Opening Cross: Don’t Forget the Fundamentals

I’m talking, of course, about the underlying fundamentals of a company that—along with other factors and market forces—generate changes in its stock price. Things like a company’s overall financial health, its assets, its directors and shareholders, as well as new factors such as ESG (environmental, social and governance issues).

In the old days, fundamental research meant poring over company accounts, or going to Companies House in London and looking up information about a company’s incorporation, shareholders, etc.

Now, fundamental research is much more readily available, and it covers a broader array of factors than before as traders and investors look for information that will give them any form of advantage.

In some cases, the modern-day innovators in this space are companies like RavenPack and Selerity, which ostensibly perform news sentiment analysis, but which are essentially trying to be first to spot a news item reflecting any changes in—or any other information that would contribute to any material changes in—these fundamental items. Being first to deliver and interpret these items means traders can incorporate fundamental factors alongside their own real-time analysis, giving extra depth and validity to their trading decisions.

In other cases, the key is simply to make something available that was previously hard to obtain. For example, Melbourne, Fla.-based investment analysis and research provider ValuEngine has begun making its daily reports on US stocks—based on the vendor’s valuation model and forecast model—available in Chinese to institutions and investors in Hong Kong and China, as well as to clients of US online broker SogoTrade, many of whom are native Chinese speakers, says ValuEngine president and chief executive Paul Henneman. The vendor’s decision to translate the reports is a direct reflection of the growing Chinese economy and demand from Chinese investors for access to information on US stocks.

Meanwhile, energy and commodities data provider Platts’ introduction of new forward curves for natural gas liquids has created an interesting development: substantial disparities between prices for the same contract at future dates, depending on whether one uses the forward curve or price forecasts from the vendor’s Platts Bentek division. The key is that the forward curves create a price based on current market pricing information, whereas the Bentek forecast incorporates factors that are anticipated to take effect and have an impact on prices at some point in the future, such as the “crackers” used to extract natural gas liquids. At this point, the crackers don’t exist, so you would put a different figure on supply now than you would in the future. Neither is wrong, per se: one is right at this point in time, and the other will be right at a point in the future. And over time, the curve will, well, curve into alignment with the fundamental forecast. You can’t arbitrage between the prices, but what you can do is use the two together as an indication of what to pay or receive now, the direction in which a price is moving, and what you can expect in the future if certain factors come to pass.

Of course, even in long-term strategies, latency has a role to play in ensuring you can execute that long-term trade quickly and efficiently and not get picked off by someone else who figures out your strategy and hopes to make a short-term profit on your long-term investment plans. In short, fundamentals, price data, low-latency technologies, and sentiment analysis, among others, are all different arrows in a modern trading firm’s quiver—all of which market data professionals must be able to deliver to end users.