Thesis/Idea: Create an algorithm that will automatically input real time earnings data and trade on earnings surprises.(Hoping to gather data from the fastest news source available) The idea here is to obtain earnings report as soon as possible, then let an algorithm automatically trade let's say if the earnings were higher than avg analyst expectations. My theory is if one make a trade within 1 second of the earnings report release, would one not beat 99% of the fundamental traders who have not even opened the report? (Hedge Fund algo traders might beat you) If a company have a positive earnings report, and a long position is immediately established , there is very limited exposure and downside risk. (limited market exposure as well) I'm wondering if this is an implementable trading strategy, or am I being way too naive.
it's an idea that i have not had a chance to implement--I have not mainly because i've found that these types of ideas are surprisingly not profitable.
My very abstract theory right now is that most of the hedge funds running a similar algorithm will beat you to the punch due to infrastructure. However, i doubt most institutional or retail investors will be able to beat an automatic trading program. This strategy in my abstract view have very limited downside as stock rarely fall from a positive earnings announcement. (Other way around is true for shorting negative earning surprises) Additionally, if you only hold a stock for a few hours and close out before the end of the day, there should be very limited market risk, making this almost a market neutral/absolute return strategy. One could also hold the stock for a few months and take advantage of the PEAD (Post Earnings Announcement Drift).
All of this can be exponentially more profitable of course if one has a news source that is able to obtain earnings report a couple minute before other investors. My question would be has this been overdone to the point that all the algo hedge funds are taking the profit out of it? (Shouldn't be the case since PEAD is still statistically significant right? The equity price should move in the same direction of the earnings surprise in general, so even if the ones algorithm only beat the retail investors, there should be still upside room)
Earnings often come with lots of other data, such as forecast info, future strategy etc and this is really up for interpretation by individual investors. As such, I'm not sure it is safe to assume that "equity price should move in the same direction of the earnings surprise in general".
You wouldn't be able to act on earnings a couple of mins before announcement because that would be insider trading. And as you mentioned, you should expect HFT traders will beat you to the trade upon announcement. But there still may be some alpha in the system based on PEAD as you mentioned.
I wonder how fast EventVestor releases their earnings data - I suspect not within a minute of announcement.
Thank you very much for your thoughts. By acting on the announcement i meant using a site such as EventVestor where earnings are delivered within the minute. I suspect this will be far faster than most retail investors or fundamental traders who take the time to digest all of the information.
My very abstract theory is while what you said about other data within earnings is true and do affect stock prices, a stock very rarely drop significantly following a positive earnings surprise. If one were to implement a strategy like this over a vast quantity of stocks, I bet the majority of equity prices moved in the same direction as the earnings surprise. (Especially immediately following the announcement) I just don't see a lot of downside risk because of this in my opinion. While the upside potential can be significant especially over many trades for significant risk adjusted alpha. Of course I'm just throwing ideas around right now, and hadn't actually implemented this myself yet.
I'm wondering how would one import real time news such as EventVestor earning data into a algorithm. I'm quite new to this algorithmic trading, so I would really appreciate it if someone can point me in the right direction.
Thanks
I do not think there is a single hedge fund out there that intentionally leaves alpha unless it has to, and i think earnings reports are too slim to leave anything. of course, i could be wrong because i have not empirically tested this hypothesis.
Thank you very much! I'll have to see how I can trade a stock within 1 second of the earnings announcement. My abstract theory is that even if I get beat by every HFT, I'll still be ahead of every institutional/retail/fundamental investors digesting the report. That on top of the limited downside risk and PEAD, should lead to some nice alpha.
You cant do that on the Q platform - the cycles on Q are per minute. So you would probably be about 2 or 3 mins behind.
Do you think I'll have to build my own software in order to do that? Is there any software you know that would allow me to implement this strategy? It seems like the alpha generated in this strategy will mainly come from beating as many investor to the news as possible and PEAD.
The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.
In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.