{"id":1190273,"date":"2020-06-15T09:39:55","date_gmt":"2020-06-15T14:39:55","guid":{"rendered":"https:\/\/oilandgas-investments.com\/?p=32569"},"modified":"2020-06-15T09:39:55","modified_gmt":"2020-06-15T14:39:55","slug":"the-impact-of-algos","status":"publish","type":"post","link":"https:\/\/juniorminingnews.com\/?p=1190273","title":{"rendered":"THE IMPACT OF ALGOS"},"content":{"rendered":"<p>The rise of the machines \u2013 that was what went through my head after my conversation David Awram, Senior Executive VP of <span style=\"color: #008000;\"><strong>Sandstorm Gold (SSL -TSX, SAND \u2013 NYSE)<\/strong>.<\/span><\/p>\n<p>I\u2019ve known David for years and one day just talking he mentioned how he had to write press releases to get\u2014or not get\u2014the attention of algorithmic trading bots (algos).<\/p>\n<p>It turned into a fascinating conversation\u2014and a real dilemma for public companies.\u00a0<\/p>\n<p>Now, I knew automation and algos were invading the financial industry.\u00a0 But I sure did not understand just how pervasive it had become.<\/p>\n<p>Awram says he has to draft Sandstorm\u2019s press releases with the algos in mind.\u00a0 It prepares its financial statements knowing that they will be read by bots and scraped into databases.\u00a0 They even time their earnings reports to avoid being excessively targeted by algos.<\/p>\n<p>You do not just tell your story to investors anymore.<\/p>\n<p>Nope.\u00a0\u00a0 Nowadays you have to make it appealing to the machines.<br \/>\u00a0<\/p>\n<h2 style=\"text-align: center;\"><span style=\"color: #008000;\"><strong>Rise of the Quant<\/strong><\/span><br \/>\u00a0<\/h2>\n<p>When it comes to determining stock prices, computers are now more important than human beings.<\/p>\n<p>A recent study by Deutsche Bank estimated that 80% of equity trades are executed by algos \u2013 with no human input.<\/p>\n<p>Last year Morningstar published that for the first time passively invested assets exceeded actively managed assets.<\/p>\n<p>This shift means that to get a positive reaction to a news release or financial filing, the content must be curated to the tastes of the machine.<\/p>\n<p>Those machines are run by quantitative funds (\u201cquants\u201d).\u00a0 Their rise began in the 1980s.\u00a0 \u00a0<\/p>\n<p>Their success has led to a proliferation of machine-based trading strategies. These strategies are devised by mathematicians, often with little knowledge of the underlying companies.<\/p>\n<p>Quants base their investment decisions on pre-defined rules \u2013 an automation of the decision-making process \u2013 or more recently, rules that evolve as the machine \u201clearns\u201d.<\/p>\n<p>When quants started out the rules were straightforward.\u00a0 Buying stocks on fundamentals metrics, technical indicators or comparisons to other stocks and indexes.\u00a0 Common strategies are now well known:\u00a0<\/p>\n<ul>\n<li>Trend following strategies<\/li>\n<li>Mean reversion strategies<\/li>\n<li>Arbitrage trading strategies<\/li>\n<li>Statistical arbitrage<\/li>\n<li>Index arbitrage<\/li>\n<li>Volume-weighted-average price algorithms<\/li>\n<\/ul>\n<p>But as time has passed the strategies have become more sophisticated \u2013 and more opaque.\u00a0 Quants have entered a fuzzier world \u2013 one where the rules are based on <strong>sentiment<\/strong> \u2013 which is not so black and white.\u00a0<\/p>\n<p>Algorithms scrape through filings, blogs, newspapers and press releases, looking for words and phrases that they can trade on.<br \/>\u00a0<\/p>\n<h2 style=\"text-align: center;\"><span style=\"color: #008000;\"><strong>All about Patterns<\/strong><\/span><\/h2>\n<p>Algorithms don\u2019t look at a stock like a human investor would \u2013 they are only interested in patterns.\u00a0<\/p>\n<p>Algorithms use pattern and trend recognition to correlate numbers, words and phrases to big moves in stock prices.\u00a0\u00a0 They back test their strategies to find what has worked best in the past.\u00a0 Then they prowl the newswires, regulatory filings, and blogospheres for the next similar set-ups.<\/p>\n<p>When you put out a press release in the United States, you have to code it.\u00a0 The SEC\u2019s documentation system, EDGAR, requires that every line of the press release be coded into the database language XML.<\/p>\n<p>As soon as that code is released to the public, groups like Reuters, Bloomberg and other news analytics companies \u201cscrape\u201d the data within milliseconds of its release.<\/p>\n<p>Their databases are populated and the algos instantly pick up on any key terms that they might be looking for.<\/p>\n<p>As Awram says, if you want to catch the attention of the algos (or not catch it, as the case may be), you have to play the game.<\/p>\n<p>\u201cYou try to make sure that you are picking up on keywords and key items. For instance, when we are writing press releases we want to highlight the \u201crecords\u201d.<\/p>\n<p>When we have record revenue or record cash for the quarter, you want to put the word \u201crecord\u201d in the press release a few times. You want to put it in there an annoyingly numerous amount of times.\u201d<\/p>\n<p>As Awram admits, the resulting press release may sound silly to a human being.\u00a0 But that is not the primary audience anymore.<br \/>\u00a0<\/p>\n<h2 style=\"text-align: center;\"><span style=\"color: #008000;\"><strong>Self Re-enforcing<\/strong><\/span><br \/><span style=\"color: #008000;\">\u00a0<\/span><\/h2>\n<p>The primary audience are companies like RavenPack \u2013 a news analytics company.\u00a0 RavenPack scrapes through newswires and company filings, processing the content for their subscribers.\u00a0 Each batch of content is curated into a sentiment score.<\/p>\n<p>A paper last year by the Federal Reserve used RavenPack\u2019s data to study the influence of algos on the market.\u00a0\u00a0 Among the observations was that algorithmic sentiment can become self fulfilling.<\/p>\n<p><em>\u201cAlgorithmic traders learn dynamically about the precision of RavenPack, <u>and they rely more heavily on RavenPack\u2019s sentiment scores if these scores have been more informative in the past<\/u>.\u201d<\/em><\/p>\n<p>Of course, this has a snowball effect.\u00a0 More confidence in the trade begets more trading \u2013 which begets more confidence.<\/p>\n<p>I am not trying to single out RavenPack.\u00a0 They are merely as easy example.\u00a0 The point is this \u2013 algorithmic trading almost always comes down to doing what has worked in the past.\u00a0<\/p>\n<p>You can see where this leads to.\u00a0 The essence of momentum is buying something simply because it is going up.\u00a0 Not because there is a fundamental reason to.<\/p>\n<p>Such strategies work very well, until they don\u2019t.\u00a0 It is easy to see how algos could exaggerate trends and lead to bubbles.<\/p>\n<p>With companies having no choice but to play along, tailoring their press releases to what the algo wants to see, you gotta wonder \u2013 where does this end?<br \/>\u00a0<\/p>\n<h2 style=\"text-align: center;\"><span style=\"color: #008000;\"><strong>These are not Stock Pickers<\/strong><\/span><\/h2>\n<p>Lost in it all is the business.\u00a0 Quants usually know very little about the industry or company they are investing in.<\/p>\n<p>As Awram described his discussions with quantitative funds:<\/p>\n<p>\u201cIt&#8217;s so weird having a conversation with them, because they don&#8217;t know anything about your company.\u201d<\/p>\n<p>It does not help that the big data aggregators, like Bloomberg, SAP or Thomson-Reuters, rely on automation as well.\u00a0 Their fact sheets and ratio tables are populated by a process that is entirely automated.<\/p>\n<p>These processes don\u2019t know or care if they are reading the financial statements of a software provider or a gold company.\u00a0\u00a0\u00a0 As a result, it is not uncommon for their tables to be incorrect.\u00a0<\/p>\n<p>One particular headache are mark-to-market assets.\u00a0 \u00a0Price changes of a debenture or warrant, or the currency impact of a foreign debt, can make the numbers published by the aggregators wildly different than the underlying reality.<\/p>\n<p>But trying to get those results changed can be a real headache, even though the data can be, as Awram put it, \u201ctotally wrong\u201d.<\/p>\n<p>\u201cIt&#8217;s not easy, and they never ever disclose what their methodology is, as to how they might come up with some of these ratios and these numbers. And so, you try to walk them through it, and they&#8217;re not terribly responsive. You never get the same person.<\/p>\n<p>\u201cYou want to make a complaint about the content of your company on those sites &#8211; they say, &#8220;We can&#8217;t do anything about it.&#8221;<br \/>\u00a0<\/p>\n<h2 style=\"text-align: center;\"><span style=\"color: #008000;\"><strong>Getting Help from the Dark Side<\/strong><\/span><\/h2>\n<p>A whole new industry is arising out of the confusion.\u00a0 Consultants are looking to help companies traverse the algo landscape.<\/p>\n<p>Awram says he gets emails from \u201cconsultants\u201d (who he suspects are traders or principals from failed funds themselves).\u00a0 \u00a0\u00a0Their pitch goes something like this:<\/p>\n<p>\u201cHey, I realize you&#8217;re trading on New York stock exchange. You have good values and algos are really trading a lot. I used to be algo trader. How could I hire up my services to you to help you manage your data, give you advice?\u201d<\/p>\n<p>\u201cI&#8217;ll help you construct your financial statements and your news releases in order to accommodate these things.&#8221;<\/p>\n<p>But are they really helping?\u00a0 \u00a0<\/p>\n<p>You could easily imagine these consultants playing both sides.\u00a0 Sure, they will help your company match the algos.\u00a0 But what is to stop them from turning around and selling their services back to the algos, filling them in on what they just recommended for you.<br \/>\u00a0<\/p>\n<h2 style=\"text-align: center;\"><span style=\"color: #008000;\"><strong>What\u2019s best for the company \u2013 <\/strong><\/span><br \/><span style=\"color: #008000;\"><strong>What\u2019s best for the algos<\/strong><\/span><\/h2>\n<p>\u00a0<br \/>My concern is that the business is going to get lost in the muck.<\/p>\n<p>Awram gave me two examples of how simple accounting can really mess with algos and make the stock price go awry of fundamentals.<\/p>\n<p>First, Sandstorm pays 30% of their interest costs through a Turkish subsidiary, as they actually have one operating interest besides all their royalties.\u00a0\u00a0\u00a0 As a result, the value of that equity depends partly on the Turkish lira.<\/p>\n<p>If the Turkish lira goes down, Sandstorm must book a loss on the value of the equity.\u00a0 It\u2019s an accounting charge \u2013 nothing more.\u00a0 In fact, the reality is the opposite \u2013 a cheaper lira means lower costs (while their gold is sold in US dollars) \u2013 the business is better!<\/p>\n<p>A seasoned investor or analyst would note this and ignore the accounting relic.\u00a0 But algos don\u2019t understand the business.\u00a0\u00a0 They don\u2019t know what a Turkish subsidiary is.\u00a0 All they know is that earnings have gone down.\u00a0 Sell!<\/p>\n<p>Same thing happens with convertible debentures, which Sandstorm holds several of from their partners.\u00a0<\/p>\n<p>These need to be mark to market each quarter and this non-realized revaluation of assets impacts earnings.\u00a0 If the stock price is down at the end of the quarter compared to the last quarter, the drop in value of the convertible debentures counts against the company\u2019s earnings.\u00a0 Even worse if they are in Canadian dollars as that currency exchange needs to be marked as well. Warrants that are not priced in the functional currency of the company can also cause a crisis to earnings results as well. <\/p>\n<p>A warrant mark may totally wipe out earnings for a quarter.\u00a0 Again, an investor would pay this no attention.\u00a0 But an algo scouring the entire NYSE and running an earnings-based strategy will not be so shrewd.<\/p>\n<p>\u00a0<\/p>\n<h2 style=\"text-align: center;\"><span style=\"color: #008000;\"><strong>Changing the Minds of Machines<\/strong><\/span><\/h2>\n<p>\u00a0<br \/>Sandstorm, like all companies, is doing everything in their power to moderate the impact of algos. But as Awram says, \u201cit takes a lot of work\u201d.\u00a0 Guidance is another point of contention.<\/p>\n<p>\u201cYou have to spend a lot of time thinking about what your guidance is going to be, because that&#8217;s one of those items that they end up pulling out of there.\u201d<\/p>\n<p>It is even to the point where Sandstorm will only notify investors of an upcoming earnings release a few days in advance.\u00a0 The shorter the notice, the less the chance that they will get marked on the algos schedule.<br \/>It is all about being a step ahead \u2013 or your stock price will suffer.<\/p>\n<p>The problem is \u2013 none of this has anything to do with the business.\u00a0 The algos don\u2019t know the business.\u00a0 The mathematicians that build the algos don\u2019t know the business.\u00a0 The big data aggregators like Bloomberg and Thomson and their data scrapes and article writing algorithms don\u2019t know the business.<\/p>\n<p>If so few know the business, at what point does the business cease to matter?<\/p>\n<p>I don\u2019t know if it ever comes to that.\u00a0 But there is no question that machines are taking us a step more removed from what is actually happening on the ground.<\/p>\n<p>And that, in my opinion, is not a good thing.<\/p>\n<p><span style=\"color: #008000;\"><strong>Editor&#8217;s Note:<\/strong><\/span>\u00a0 Companies have been mining gold at a cost of $1,000 per ounce and selling it for $1,200 per ounce, booking $200 per ounce of profit for years.\u00a0<\/p>\n<p>In 2020 they are suddenly going to be mining it for $1,000 and selling it for $1,700 per ounce, which is a profit of $700 per ounce\u2026\u2026350% higher.\u00a0Get great gold leverage right here in the USA\u2014\u00a0<a href=\"https:\/\/cts.vresp.com\/c\/?OilandGasInvestments\/980f32c3be\/f198857fc2\/2579620e2f\">Click HERE<\/a><\/p>\n<p>Keith<\/p>\n","protected":false},"excerpt":{"rendered":"<p>The rise of the machines &ndash; that was what went through my head after my conversation David Awram, Senior Executive VP of Sandstorm Gold (SSL -TSX, SAND &ndash; NYSE). I&rsquo;ve known David for years and one day just talking he mentioned how he had to write press releases to get&mdash;or not get&mdash;the attention of algorithmic [&hellip;]<\/p>\n","protected":false},"author":19,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"site-sidebar-layout":"default","site-content-layout":"","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"","ast-breadcrumbs-content":"","ast-featured-img":"","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-gradient":""}},"footnotes":""},"categories":[528],"tags":[],"_links":{"self":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1190273"}],"collection":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/users\/19"}],"replies":[{"embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=1190273"}],"version-history":[{"count":2,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1190273\/revisions"}],"predecessor-version":[{"id":1196845,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=\/wp\/v2\/posts\/1190273\/revisions\/1196845"}],"wp:attachment":[{"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=1190273"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=1190273"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/juniorminingnews.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=1190273"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}