If you are interested in investing, you probably have wondered how to best incorporate daily news flow into your trading strategy. With so many things being reported in the world, it is difficult to process information accurately and holistically without being impacted by personal biases. RelateTheNews is a fintech startup started by Tim Decker that helps you do just that. We spoke with him about how RelateTheNews works and how it could be valuable to prospective investors.
This interview has been condensed for clarity. If you work at or own a fintech startup and are interested in contributing, tweet us at @ValuePenguin.
Why and how did you start RelateTheNews?
I was a part of a startup straight out of college in the late 90s that was building trading software and platforms for individual investors. When we were doing it, it was all still kind of new and I just fell in love with financial markets. And providing technology-based solutions to individual investors was the bulk of the first half of my career. I’ve worked for Charles Schwab, and I’ve worked for two smaller retail brokers, both of which were technology startups. The number one thing that clients wanted was to make the news useable. News is there, news exists, we all read it. But how do I know what to do with it? That was the genesis of RelateTheNews.
In 2007, I started working with large institutions, billion-dollar plus money managers. The interesting thing is that they have a similar challenge, but they have even more text-based data that they need to integrate. It’s not just news—it’s regulatory filings and analyst reports. Some of them even analyze their own text, emails or reports created within their own firm to start to see trends. It’s not just relating the news, it’s relating text-based data to the markets.
In laymen’s terms, how does your product work?
What happens is we, in real-time, 24 hours a day, seven days a week, read news and any other texts that can be read. It’s read by using our proprietary software. First, it uses standard industry techniques to look for metadata: company tickers, company names and sectors. Then we go into the process that’s a lot more proprietary, where we’re looking for sentiment contained within words and phrases, using natural language processing (NLP). Big players like Google are also using NLP, but they’re using it to predict what you’re going to search for, versus finding meaning in something. That’s really what we’re doing—we’re finding meaning in a repeatable way.
Using this software, anyone can incorporate this new set of data into their trading strategy. For instance, relative strength index (RSI) was one of my technical indicators I used to trade. Basically that’s a technical indicator saying, “Hey, now is a good time to make the trade.” You can use our data to apply it within your existing framework for making trading and investing decisions. You look at all the data that you’re currently looking at, and it comes in there and says “this is a good time” or “this is a bad time” to enter into this trade. That’s one way to use it.
Second way to use is to find wholly new opportunities. For our individual investors, we have three primary dashboards. One talks about the sentiment as it’s changing over time, with an intraday through 90-day view for individual clients. It lets you look at how sentiment is changing. We have about a three-day lead indicator for our momentum relative to the Dow Jones. For instance, as you see our momentum start to go positive for sentiment, three days later you’ll see a positive movement in the Dow Jones.
The next is finding new opportunity. Every day you see a dashboard that shows the most written-about companies in the news and gives you sentiment scores for each one of those companies. You can start to say, here are some new companies to start to look at, and then put into my existing—again, fundamental or technical—process. And then lastly, it’s kind of a news dashboard that looks more at the article view and lets you know the top 25 most positive or most negative articles from today; maybe those are the things you should dig into to find opportunity.
Ultimately, it’s really a mix of company-specific news flow analysis as well as market-wide analysis.
How effective is RelateTheNews in improving investment performance?
One of the functionalities of RelateTheNews is the contrarian indicator, which is our total count of negative or positive news, but in this case negative news. When our contrarian indicator is quite large, you’ll pretty much see a reversal in the market. That is a statistically significant correlation between that piece of data and the Dow Jones index.
For example, I really like the one during the Brexit vote. The Brexit vote was, I believe, on a Wednesday. If you had asked anybody during that Wednesday, Thursday, and Friday, what’s going to happen with the markets—if you read what was written—a lot of the headlines said the markets are going to go down for the whole rest of the year because of the Brexit vote. I can tell you that on that Thursday, our sentiment indicator indicated that within three days the markets would rebound. On Tuesday morning—so three market days later—we saw a week-long, strong rebound in the Dow Jones. On balance, that rebound has continued through to today. We’ve definitely had our up and down days, and you can see that in some of our data, but the sentiment data around the Brexit vote was a really strong indicator, and a great way for an individual investor to get ahead of and be able to participate in good financial opportunities.
Who are your customers currently?
We have a few asset management firms who use us more as part of their risk management or compliance process. When I say compliance, I mean trading compliance, not necessarily the bigger topic of regulatory compliance.
On individual investor side, we have two primary types of clients. One is what we like to call the engaged investor. That’s somebody who might be using our site just as another news view into the world. They generally have somebody else managing their portfolio. They might be a client of an advisor somewhere. And then we have what we call the active traders: men and women who are managing their own portfolios, making their own trading decisions each and every day. They’re using it as a way to find new opportunities, make new trades, and then make sure they’re ahead of the game on the risk side. Is there big news changing or new sentiment changing what their stock outlook might be? So that’s on the retail side.
As far as number of clients, on the institutional side, there are about $6.5 billion of global hedge fund assets using our product. On the retail side, we just launched our full product in February of this year. We have seen great traction among clients using our site on a substantially recurring basis, and that just continues to grow.
Are there any competitors to the product right now in the market?
First of all, in what we are really categorized as—which is alternative market data—there are definitely other players in this space. There are some other companies who are doing sentiment analysis, but they focus solely on social. Again, if we go back to my early experience, retail investors were saying, “Help me make news more usable.” That’s really what we focused on—news. Once we went into the institutional market space, they were excited that we were not looking at social, because there are social solutions out there. This keeps it so that you are truly not going to have a wall between getting social sentiment data, but only getting pure traditional media news, regulatory filings and analyst reports.
How much does it cost to use RelateTheNews?
For individual investors, it’s a monthly subscription fee after a free 30 day trial, although you can pay for an annual subscription fee. Our annual subscription fee is about $9.95 to $19.95 a month, depending on how much data you want to be able to take off our site. One of those active trader individuals might want to be able to take a small set of our underlying set off our dashboards; we charge a little more for that. All in line with the other players in this space, and definitely ultra-competitive when you compare us with some newsletters that are very specific.
For launching and growing your company, what are some of the biggest obstacles you faced?
One is, starting any alternative market data business, you need a good long historic set of data before you can measure the value. You ask those questions of, “How often are we right or wrong? How often are we a profitable indicator?” You need lots of data to do that. Our big lesson has been to build that data set. We started building our algorithms in late 2013 and adjusting those as we evaluated whether they were right and how effective they were. And then starting May 2014 to now, we get 24/7 daily data. The big lesson here was to build up the data set. You need that for individuals and institutions. They need to be able to go back and say, oh yes, it has proven to be valuable at different moments in time and has done so consistently.
What are some of the shortcomings of the product today?
On the individual side, we have so much data, and we’ve only exposed a very small bit of it. That’s because to create meaningful dashboards takes time. We really want the dashboards to be effective immediately. That’s going to be a full life-long goal of the company: to continue to put a face to the data that helps customers really make impactful decisions.
What advice do you have for a new investor for looking to employ this product and algorithmic trading strategy?
In reality, whether you’re a fundamental or a technical trader, you are already doing some form of quantitative investing. You are taking known quantities and trying to understand their change over time and react to that change in the market. If you’re trading fundamentals, you’re already looking at numbers all the time. If you’re looking at technical, you’re already trading numbers.
To me, the risks are fundamentally no different than fundamental or technical trading. The challenge is in quantitative trading—the pace can be significantly faster because of the firehose of data that you have to act on.
I think the importance of getting repeatable, actionable insight is key. I can read an article one day when I’m in a good mood, and I’ll read it a certain way, and then the next day I might read it and take a little something different out of it. Whereas the beauty of employing an algorithmic strategy like this to analyze the news is you’re going to get the same results every single time, over time. If you read the same article again and again, you’ll get the same results. In the markets, some of what we want is repeatability so that you can get a consistent result. RelateTheNews is doing this every day, all day long. It does help eliminate personal bias and uncover new opportunity to capitalize on.
Editor's note: Technical trading refers to the use of statistics on trading activity, such as price movements and volume, to try to predict future movement of a security. Individuals who employ fundamental trading, on the other hand, look for the intrinsic value of a security by evaluating related economic and financial measures, such as the overall economy or the company's management. The intrinsic value of the security is compared to the security's actual price to see whether the security is over or undervalued.