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Funds managing billions hunt for investment clues in newswires, weather, Twitter
Two Sigma is part of a new frontier in computerized investing, in which scientists and engineers with little formal financial training are trying to funnel massive computing power into predicting securities prices by drawing from clues in news and data.
“The secret of the markets is they can be predicted,” says Alexander Migdal, a former Soviet physicist in Princeton, N.J., who writes algorithms to predict securities prices based on a broad set of data, such as news feeds. “Not 100%, of course, but just enough to make a difference, to make a profit.”.....
Mr. Migdal, the former Soviet physicist, after leaving academia started a high-frequency-trading firm using computers to zip in and out of markets, earning tiny profits on hundreds of thousands of transactions. But he believes the profit opportunity there is diminishing. His new company, Migdal Research LLC, is devoted to longer-term predictions based on a broader data set.
Mr. Migdal, 69, compares data to water drops before they form a river. “Many little movements of the drop may become a flow,” he says. “Not all the events in the financial world take the form of dramatic and obvious announcements. Quite often, they begin as small drops moving in the same direction in a way that isn’t immediately visible to the human observer.”
Still, says NYU’s Mr. Kolm, computers aren’t close to being omniscient: “For the majority of financial-prediction models, the degree of certainty is much, much weaker” than even weather forecasts.