A new beast is stalking the derivative markets — lexical algorithms. These programs scan news feeds for key words, aggregate the information and produce a tradable output designed to capture market sentiment. The stream can be fed into a trading programme, allowing machines to “trade the news”. Tom Osborn and Siân Williams talk to the creators and the punters, and find out if there’s gold in them thar words.
Algorithmic trading makes up a growing share of futures and options trading. But specialists in the field believe there are limits to how far the technique can run on its present track of development.
More and more firms are using complex numerical algorithms to trade off the results of quantitative analysis at ever-lower latencies. Yet the race to lower latency has physical limits and the law of diminishing returns means that there may come a time when it is no longer...