Sentiment Analysis Still Has a Long Way to Go on Wall Street

Was DCM Capital's failure a sign that the industry is not ready for sentiment analysis? Or was it a blip? Anthony explores.

Sentiment analysis─it's been much bandied about, but without much hard evidence that it's worth the headache.

This past week we saw a firm try to commodify the technology. London-based DCM Capital has had a stormy go of trying to use sentiment analysis as a money generator. In the beginning DCM was a hedge fund named Derwent Capital Markets that based its investment decisions on sentiment analysis from the social networking site Twitter. That did not work so well as it struggled to raise capital during difficult market conditions.

After the fund closed, it rebranded itself as DCM Capital and entered the vendor space with its sentiment-based trading platform, which was aimed at retail investors. As my colleague James Rundle wrote back in May, "The technology powering it has been developed entirely in-house using the financial resources from Derwent's ill-fated venture, building on a core of the sentiment analysis tools initially built for the hedge fund."

I found it interesting back then that they were targeting the retail space and not hedge funds, considering their ties to the alternative investments market. Was it that there was absolutely no interest coming from hedge funds? And is that a sign that this is not something they are ready to jump on just yet?

Apparently, though, the retail space wasn't ready for the technology either, and a couple weeks ago DCM Capital CEO Paul Hawtin put the platform up for sale in an online auction. The asking price was £5 million ($7.9 million) with a breakeven point of £350,000 ($550,000).

After the auction closed two weeks later, the winning bid was £120,000 ($186,000)─98 percent off the asking price and 65 percent off the breakeven price.

This poor showing might be an indictment of DCM's technology (or decision to go the auction route, rather than hiring a professional firm to sell it) and not necessarily a shunning of sentiment analysis altogether. But over the last year I've spoken with numerous C-level executives inside hedge funds and asset managers─as have my colleagues─and attended numerous conferences and the common refrain is that they are still "investigating" how best to incorporate sentiment analysis, but they aren't ready to jump on it just yet.

But there are positive signs, too. In the last month both Dow Jones and NYSE Technologies have partnered with sentiment analysis vendors in order to get ahead of the curve.

For whatever it's worth, I really have my doubts that sentiment analysis will ever be the driving force of a successful firm making its investment decisions. But there is room for it to be used as a guiding data point.

The way I see it, an app or dashboard that gives historical context into a security's overall social networking sentiment could prove a valuable tool for a trader who is 50/50 on a pick. My other guess is that this will first be developed on the sell side and will eventually find its way over to the buy side.

Am I wrong? Am I right? Should I stick to talking about beer and sports? Shoot me an email at anthony.malakian@incisivemedia.com or give me a call at 646-490-3973 and let me know your opinions.