How valuable is it to a trader to know what other experienced traders around the globe believe the settlement prices will be for that same day–before the market opens?
According to a 20-year veteran trader, a pioneering investment industry executive and one of the foremost authorities on prediction markets and collective intelligence–information sitting at the intersection of the markets and the media–could be the new edge.
Much has been made recently over how hedge funds and other traders get their information.
The Internet has forever changed how we get our information and while some may say it leveled the playing field, it also dulled the edge for traders. This hasn’t stopped the alternative investment industry where change always means opportunity and disruptive technology is generally embraced. Witness the advent of the Twitter Fund and others who specialize in gleaning and distilling information faster and better in order to find the alpha edge.
We caught up with the founders of The Daily Delphi to discuss their approach to gleaning information from traders and providing a new edge with predictive market technology. This is a new twist but not a new field, as more and more hedge funds and prop trading firms are developing algorithms and models to trade off the filtered “big data” hose of social media spewing out streams of market insight and sentiment.
It’s an accomplished team considering Jeff Joseph’s past accomplishments as innovator of provocative new retail alternative investment products as the man that launched the Alternative Strategies group at Rydex Investments, Dave Karnes’s two decades as a futures trader and Daniel Diermeier’s practical applications of game theory and prediction markets. The team is confident that their research output will be valuable to traders and investors.
AAA.com: Where did the idea of The Daily Delphi come from?
DD: So much has changed over the years as floor trading has evolved to electronic trading. There was a time when all the information you needed was right there in front of you. A floor trader could see everything. He knew what the big houses were doing; what the technicians were saying about their levels what the fundamentalists thought about the news reports; and when the momentum guys were jumping on the bandwagon and the scalpers were doing their thing.
You could see it all in one place and make sense of what was going on in the market. Everyone had an opinion and everyone talked. These were the people that made the markets move. They were the market.
As trade volume migrated to the screens the trading world became dispersed and more segmented. Today there are thousands of traders all over the world making trading decisions based on their own little slice of data. Sure today’s information flow is extraordinary, but it’s overwhelming. How can you process and filter all the noise?
That’s what Daily Delphi does; we give traders one more piece of critical information, a tool, based on the information and insights of thousands of other traders in a given market. The knowledge gain is very valuable. Everyone knows that the opening price won’t be the settlement and no one price is indicative of the next. But what if a trader could know the daily sentiment of other traders in his market before the opening bell? That acumen can help make sense of a crazy market move or simply provide conviction to a bias. In effect, the crowd is the market and is certainly wiser than any one individual, so it reasons, when you know what the wiser crowd is thinking you have a knowledge edge.
AAA.com: What’s the basic premise behind The Daily Delphi? How does it work?
DD : Markets do many things, but they are very good at aggregating decentralized information through prices. Prediction markets are a natural extension of this idea to many other events, such as sports or politics, but prediction markets are often a hassle to run and require a reasonable number of active traders. Our mechanism is simple, easy and fun to use, but preserves the main properties of markets. Traders have an incentive to participate and, through their actions, effectively share their local knowledge with the group. Our mechanism then aggregates this information in unbiased fashion and reports it back to the group.
AAA.com: How are the participants selected? What is in it for them?
DD : If you are an active professional trader we want your input. Our constituent selection process is biased towards the global community of prop, quant, algorithmic and hedge fund institutional traders. Futures, Forex and equity traders are currently coming to us from around the world to contribute their daily forecasts on the S&P, gold, oil and currency closing prices in exchange for receiving the daily output for free.
On a daily basis, before the markets open, our mobile app prompts the trader to submit his closing forecast for that same day on the markets that he trades. We also ask the trader to provide a probability or confidence measure. The input process takes all of 30 seconds. Then, about 15 minutes prior to the market opening the same app will send you the daily forecast. Both trend and counter-trend traders find real value in knowing what un-entered order flow looks like in advance of their own trading. Additionally, the sheer volume of inputs that we aggregate from traders around the world allows us to parse out the data and provide a dashboard reporting forecasts according to the underlying trader’s style, strategy, sophistication, confidence level and persistence of accuracy. We can also provide distribution analysis of the aggregated inputs—in essence, a transparent underlying market.
T he Daily Delphi plans to launch its daily research platform to an initial “charter member” group of 500 professional and institutional traders at no fee—see www.dailydelphi.com to sign up and follow the team on Twitter @dailydelphi