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This article contains a description of a smart trade signal (STS) that is the result of our modeling and analysis of Trade Ideas data that are communicated and stored on what is known as an alpha capture (AC) system. Trade Ideas (TI) are specific buy and sell recommendations that are sent electronically from sell-side to buy-side firms.1 Alpha capture is the platform that is utilized to facilitate, track, and deliver TIs to the intended buy-side clients. AC can be best described as the fabric that connects the sell-side and investment professionals to facilitate timely electronic communication of TI and strategies among these institutional investors. The STS test results indicate that factors that are developed using TI data have predictive strength for stock selection in longonly as well as hedge strategies.
At the time of this writing, we have identified several articles in the trade and popular press on the topic of Trade Ideas (see Craig [2009], Alpert [2008], Cass [2009, 2008], Mackintosh [2006]). A search of the academic literature did not reveal any studies that attempted to explore the stock selection or return prediction potential of TI data. In light of the social networking media derivation of TI, the closest topics that are addressed by the literature include Wysocki [1998], which documented "stock message boards and their impact on capital markets and investor relations" using the Yahoo! website; Bagnoli, Beneish, Watts [1999] found that "whispers are, on average, more accurate than First Call forecasts and are better proxies for market expectations of earnings ... trading strategies based on the relationship between whisper and First Call forecasts earn abnormal returns"; and Leinweber [2009], who founded Codexa to provide a service that utilized artificial intelligence and intelligence amplification that analyzes the "data torrent coming out of the fire hose of Internet information" in order to measure company message traffic and earnings whispers for stock selection.
With the limited extant literature on this topic, we thought it would be helpful to first give some background on this relatively new dataset to outline its primary function and increasing importance in generating alpha for large institutional and hedge fund managers. We illustrate descriptive and summary statistics of the TI data that are utilized in...