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Getting a handle on web chat that affects stocks
Posted By David Shamah On August 30, 2010 @ 12:00 am In | No Comments
Online opinion affects stock prices. Now an Israeli start up is helping investors get an understanding of how stock prices will rise and fall with a text analysis technology that aggregates this online sentiment.
Most people have an opinion, and on the Internet people express their opinions mighty freely. What many don’t realize, however, is that these opinions influence the ‘real’ world, and can have a significant effect on the value of shares in the stock market, directly affecting prices.
In an Internet age, investors are more or less at the mercy of media analysts, experts, bloggers and others expressing their opinions about, for example, how a news story will affect the price of a stock. To get a handle on the aggregate of these opinions – known as ‘the sentiment’ – that affects the way a specific stock or investment sector is perceived, an Israeli start-up called Sentigo has developed powerful algorithms, large databases, and superior search and sort tools.
Sentigo co-founder Gadi Shvadron tells ISRAEL21c that his company keeps an ear to the Net, and analyzes every scrap of public information that can affect share prices. With Sentigo, he says, it is now possible to parse through huge amounts of opinion and translate it into sentiment that is quantifiable or can be manipulated. This transforms the sentiment into a tool investors can deploy when deciding how, where, and even whether or not, to invest.
The right information for an educated decision
Checking the financial news these days is like standing on a market street in ancient Athens, with soothsayers, dime-a-dozen prophets, and self-proclaimed ‘experts’ all holding forth at the same time, often with contradictory messages.
Making sense of all those opinions and how they affect stock prices is what Sentigo is all about, Shvadron tells ISRAEL21c, adding that “Our slogan at Sentigo is creating order out of chaos, and that’s exactly what our technology does for people who follow stocks online. Today, there are great tools for users who want to trade on-line, but there is no way for them to get reliable advice on what to invest in – especially if they’re casual traders, and not day traders who are totally immersed in the markets. With Sentigo’s technology, they’re able to get a broad picture of the sentiment surrounding the market as a whole, as well as of specific stocks.”
Sentigo’s technology scours the Internet, seeking publicly available articles and opinions about stocks. Using text analysis technology and specially developed algorithms, the site then provides users with a sentiment “summary score,” an easy-to-digest grade for the online opinion about a stock or an investment sector. Users type a term (company name, stock symbol, industry name) into a search box, and receive a stream of stories, graded with a sentiment rating (letters, numbers, colors). An overall sentiment rating for all stories, expert opinions, and Internet postings (social media) relating to a stock is also available.
Shvadron stresses that Sentigo is not a predictive tool, but an informational one. “Consumers are in the final analysis responsible for what they do with their money,” he says. “Our role is to make sure they have an opportunity to get the information they need to make educated decisions. Sentiment and psychology are such an important part of investing, but until Sentigo there has been no rational way to get a handle on it. We allow users to sort through the noise and discover the information they need to help them make better investment decisions.”
Cutting through the noise
A number of case studies prove his contentions, Shvadron maintains. For example, there was a clear correlation between a sharp increase in negative online posts at the end of April about energy giant Halliburton (with respect to its role in the Gulf Oil spill) and a dramatic fall in its share price. In another case, sentiment about Capital One Finance, as reflected in online posts and articles, plummeted around mid-April of this year, when the US Senate voted in limits on credit and debit card fees. The news – and more importantly, the investing public’s perception of it – was clearly negative for the company, a major player in the credit card industry. The stock lost six percent of its value over the following days.
Seen in context, and after the fact, it’s pretty clear that these events would impact the prices of those stocks. But at the time, with thousands of voices blasting their opinions, it might not have been so easy for investors to make the connection between the public’s perception of the news, and the stocks’ value. And when it comes to less prominent stocks or less well-publicized news stories, investors might not get the sentiment message until it’s too late – and the sentiment effect shows up in the stock price.
Sentigo is still in beta, and the company is still working out some kinks – such as expanding the database to include more stocks (so far, it includes the top stocks on the major American exchanges, and Dow Jones Industrials). But Shvadron has high hopes for the company’s unique technology. Evaluation of online posts and opinions could be applied to many other areas, such as helping consumers and companies figure out which consumer electronics products are most likely to succeed.
Shvadron and his partner Omri Braun set up Ramat Gan-based Sentigo about a year and a half ago, and the company – which has 16 employees, soon to increase to 25 – is set to deploy its technology on several financial websites in the coming months, after bringing in Orey Gilliam, formerly head of AOL Messaging and CEO of ICQ.
The company is developing widgets that can be installed on financial websites (the first one, on a site called WallStMemo.com, has already been deployed) which feature sentiment information and ratings on stocks. After barely a month, says Shvadron, the Sentigo site has seen a “surprisingly large” number of hits. “Investors need useful tools to cut through the noise,” he says, “and that’s exactly what we do.”
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