Event-Driven Trading Delivers Alpha. (Remember Alpha?)
Tue December 13, 2016
Corporate event data contains important signals that can generate alpha for the firms that have access to the data and know what to look for – whether they favor a fundamental, technical, or quantitative approach.
There is a view among some traders and investors that corporate event data falls in the realm of fundamental investment strategy, not the technical or quantitative investment approach. However, corporate event data has grown in importance and has evolved, as have the ways investment firms are using it.
Recent academic research, including the report, “Time Will Tell: Information in the Timing of Scheduled Earnings News,” by Professors Travis Johnson (University of Texas at Austin) and Eric So (MIT Sloan), has clearly demonstrated that corporate event data contains important signals that can generate alpha for the firms that have access to the data and know what to look for. That’s why today, corporate event data is delivering insights and creating competitive advantages for all investment pros, whether they favor a fundamental, technical, or quantitative approach.
This evolution raises some questions: Has your firm’s use of corporate event data been updated to reflect how the data itself has changed? Are your firm’s event-driven trading strategies benefitting as much as they could be from this source of intelligence? Or is your firm still using the events from its “big box” data terminal, assuming that the data that comes bundled with your service means it has this information area covered? Or worse, are you only tracking the most basic event types, the ones that are on everyone’s radar?
A good place to start in answering these questions is to look at the old ways corporate event data was typically handled, the new types of events that are now tracked, and some of the new ways the data is used to drive improved investment performance.
As mentioned, the old model had corporate event data loosely tied to fundamental analysis. The process of measuring a security’s intrinsic value requires a close look not only at that company’s balance sheet, but at all aspects of its business and market. That analysis puts a value on that equity that can be compared to its current stock price. Undervalued equities logically present buying opportunities; for overpriced equities, it is the opposite.
The obvious link, earnings per share numbers, are factored into fundamental analyses, and EPS numbers are made public in earnings announcements. Therefore, fundamental analysts need to pay attention to earnings announcement dates.
For investors who use the technical approach, plotting corporate event dates alongside stock prices and trading volume can show correlations between corporate event dates and volatility. Once identified, these patterns can be good predictors of a stock’s future activity.
For example, consider plotting a stock’s price movement on the day of and the day after each of a company’s last eight quarterly analyst days, which can give a good indication of how the stock’s price may move leading up to and just after the upcoming analyst day. To do that, a technical analyst needs pricing information as well as accurate historical data on when the previous analyst days took place and when the next one is being held.
Now, with more event types being scrutinized, there are more ways that corporate events are factored into investment approaches and models of all kinds. Across many industries, participation in industry and investor conferences can offer information about a company’s future. In specific industries, there are even more events to watch for. This includes event dates and announcements by pharmaceutical and biotech companies about the beginning and ending of FDA clinical trial reviews, for example. Or the updates along the way. Similarly, investors in entertainment companies are tracking the dates of movie premieres and video game releases. Even the launch dates of rockets by space exploration companies are now being watched – and instantly reacted to by investors ahead, during and after the launch.
To apply the impact of corporate events, investors must have the right data at the right time. It also must be delivered in a way that they can readily put it to use. There are solutions now available, such as Enchilada™ from Wall Street Horizon, that enable new perspectives and capabilities. Enchilada brings all types of event data for individual equities – historical, forward-looking, and new event types – together in a single, online application. It makes it easy for investors to research events and turn them into actionable strategies. In addition, the roster of event types covered by Enchilada, which is one of the widest in the industry, continues to grow with new events types being added regularly.
In today’s ultra-competitive market, investment pros are looking for anything that will give them any edge that will help them beat their benchmark. These advantages can be extracted from corporate event data– the occasions when companies publicly share their information with the outside world.
It used to be a lot harder to mine valuable insights from corporate event data because it was so fragmented and inaccurate. Today, there are superb applications that help investors sift through all the sand and gravel to get to the gemstones. It’s now easier than ever to gain valuable insights from corporate event data. The hardest part for many investors is having the open mind required to see corporate events in new and different ways.
Joe Ranieri is head of channel partnerships and data management at Wall Street Horizon, the leading provider of accurate and timely corporate event data to institutional investors and IR professionals.