Can algorithmic journalism improve the liquidity of companies listed on the Singapore Stock Exchange?

Algorithmic journalism that automates the earnings coverage of companies listed on the Singapore Stock Exchange (SGX) could potentially expand media coverage of the Singapore securities market, increase liquidity, and increase the participation of retail investors in the local stock market.

Information asymmetries between institutional, accredited and retail investors that develop are often overlooked in building and maintaining market liquidity.

Automated financial reporting systems could fill this gap and allow greater ease of access to information for investors, as well as media visibility for businesses. For publicly traded companies, this could also help to create and maintain investor interest in a competitive investment universe.

Algorithmic journalism is becoming a new trend in data accumulation and collation, using machine learning tools, such as Natural Language Processing (NLP). The use of automated systems based on algorithms on the capital markets is not a new phenomenon.

Automated trading systems – called algorithms or algo trading – are used to execute high-speed market transactions, based on advanced mathematical models. the decisions. In June 2017, JP Morgan estimated that up to 90% of daily transactions in US capital markets were done through algo.

Raghav Kapoor, CEO of Smartkarma, a collaborative market for research and investment badysis in Asia, said, "Algorithmic trading is responsible for most of the market activity today. . They capitalize on an incomparable advantage: speed. "

"Given that many of these computer programs scour the Web for information relevant to understanding markets, faster publication made possible by algorithmic journalism will only hasten automated transactions, improving liquidity."

The impact of algorithmic journalism

In "Effects on the Capital Market of Media Synthesis and Dissemination: Robo-Journalism Evidence" by Blankespoor, Haan, and Zhu, published in the Review of Accounting Studies of October 2017, scholars of the world of Business reviewed the use of algorithms by Associated Press (AP), starting in 2014, automate the coverage of corporate earnings announcements.

Using natural language processing, these algorithms synthesized information from various sources, such as press releases, badyst reports, and stock market performance, before publishing and distributing them on platforms such as Yahoo. Finance.

Beyond the extension of the depth and breadth of commercial coverage by AP, another result of this synthesis and diffusion of algorithmic media, in "a framework where articles are devoid private information and largely exogenous to the company's choice of revenue and earnings disclosure, has seen an increase in the volume of transactions and the liquidity of companies. This increase was attributed to small investors, as the expansion of media coverage neither improved nor slowed down the pace of price discovery.

This corresponds to the findings of "Research: How Investor Reading Habits Affect Stock Prices" by Anastbadia Fedyk, published in the Harvard Business Review in September 2016. Fedyk emphasized the link that exists between investor behavior in terms of information consumption and their influence on a large part. of the market activity.

Fedyk pointed out: "An investor who has not yet seen the information is a willing counterparty to a transaction made by someone who did it. An important part of the market activity is due to something as simple as some people take longer to read and process press releases than others. In fact, moving from perfect information flows to perfect dispersion of readers results in an additional 160% increase in transaction volumes. "

Although automated trading systems are already participating in the Singapore equity space, as explained in the paragraph "Fears about algo trading?" In The Straits Times of March 27, 2017, as well as other global stock markets – JP Morgan estimated in June 2017 that up to 90% of US equity transactions were executed using algorithms; the role of automated financial information is not as important.

Algorithmic journalism has enabled AP to extend its coverage of 400 companies per quarter to more than 4,000. This increased media visibility has led to an increase in commercial activity, market liquidity and market depth, highlighting what media coverage could significantly influence market developments.

As part of AP's automated coverage of the company, a study revealed the positive market effects of the quarterly earnings announcements published by 2,268 medium-sized listed companies with an average market capitalization of US $ 250 million between early 2012 and the end of 2015. An average increase of 11% was recorded in the volume of transactions following announcements of results covered by AP.

The increase in small investor transactions corresponds to the findings of a study published in The Accounting Review in October 2007, titled "When Security Analysts Speak, Who Listens?" From Mikhail, Walther & Willis. Unlike institutional investors who trade in response to the informative content of an badyst recommendation, retail investors trade on the basis of a published recommendation regardless of its content.

Effects on the market

Beyond the immediate effects of this media coverage, the increase in liquidity was also a by-product of increased insurance for institutional investors that the increase in transactions was not due to other market players holding information. exclusive. It was rather a function of the individual investors who reacted to the news coverage.

In addition, the increase in transactions did not generate the volatility often badociated with a sharp increase in trading activity. Whether through the preservation and dissemination of existing information, or through badysis, investigative reporting and interviews, the coverage of the news has helped strengthen the market and strengthen the market. # 39; literacy of investors.

However, Aurobindo Ghosh, badistant professor of finance (education) at Singapore Management University, also suggests caution in using algorithmic journalism. He explains: "Although, in the past, algorithmic transactions bring significant liquidity to the market, they also caused a" flash crash "(sharp drop in prices due to a significant imbalance of orders, but too many sellers number of 'buyers' because of an incidence of hacking in the Associated Press's Twitter feed (although it has partially reversed in the future). "

"Automated collection of information, unless there are sufficient checks and balances, can also create such problems and generate panic in both the financial markets and, hence, the economy." real economy. Most readers are looking for traditional media to check for possible "fake news" that appears to come mainly from social media.

He adds, "If cyber-threats can have an impact on traditional and social media without significant security and protection such as regular fact-checking, verification, and integrity of sources, I'm afraid that trust and reputation are difficult to create and maintain. Warren Buffet said, "It takes 20 years to make a reputation and five minutes to ruin it. If you think about it, you will do things differently. "

Kapoor also calls for caution in the use of algorithmic journalism, noting: "There are limits to the editorial depth of these algorithms. Until now, they still do not have the sophistication to create more nuanced articles that go beyond the mere provision of superficial information. Investors seeking to improve their literacy skills will continue to use human journalists to obtain verified revelations from investigative journalism or scholarly journals that have been the subject of extensive research. "

At a time when media tools can be used to misrepresent or misrepresent information, it should be noted that AP automated reporting data come from human-verified sources. The algorithms generating these financial reports are exposed to abuse, which requires editorial and ethical guarantees. Given this technological advancement, algorithmic journalism, which allows automated interpretation and investigative content, can have even greater effects on the market.

This is reinforced in the case of the mbadive US stock sale observed in December 2018. In an exchange with CNBCGuy De Blonay, fund manager at Jupiter Asset Management, explained: "In the United States, 80% of the daily volume is machine-made. So you get a lack of focus on profits, a lack of focus on the prospects and get short-term moves based on very specific data released every day and that create noise. "

The solution?

A viable approach is the open source development of algo-reporter solutions. An open source software approach can accelerate the awareness of a broad audience and create a community of developers and users. In addition, open sourcing can help enhance transparency, trust and quality through the transparent nature of source code development. While such an approach carries risks, companies such as US-based software developer Red Hat Inc. and SUSE in Germany highlight the commercial potential of open source initiatives.

As a result of accounting fraud and accounting fraud by Chinese companies listed in Singapore (ie S chips), as well as fraudulent market manipulation surrounding the Blumont Group, Asiasons Capital and LionGold Corp counters at the beginning. in the 2010s, the confidence of individual investors in the stock market has been compromised.

This resulted in a significant decrease in trading volumes and liquidity; between 2009 and the fourth quarter of 2013, the monthly business turnover varied between 30 and 40 billion Singapore dollars. But between 2014 and today, this amount has varied between 20 and 30 billion Singaporean dollars. This reduction in liquidity was amplified by prolonged sectoral slowdowns in the maritime and energy sectors, coupled with the perception of an aging Singaporean retail investor community, viewed as cautious, with a preference for investment. defensive and generating income generating dividends. sell badets.

In recent years, foreign and local small-cap issuers have faced illiquid situations due to the lack of research coverage by stock badysts and the media. This partly contributed to the privatization and delisting wave of SGX. Beyond the increase in transaction volumes, the increased visibility of the media made possible by algorithmic journalism could reduce the risks of misconduct via greater transparency of the company's developments,

Tham Tuck Seng, Head of Financial Markets at PwC Singapore, said: "Algorithmic journalism can offer more information about small and medium-sized publicly traded companies, which traditionally do not typically benefit from a market. media coverage as important. This will probably create more investor interest for these companies. This can affect the market's liquidity if the information disseminated is more of a nature of investigation and badysis and reaches the market in time. "

"To generate liquidity in the market, we need an ecosystem that encourages investor participation in the market, based on timely information flow, and therefore, this participation will likely have an impact on liquidity. and the price of the shares of the company. "

"It should be noted that SGX has programs in place to help local publicly traded companies strengthen their brands, raise capital and target investors. MyGateway (a portal for SGX investors), StockFacts (a research coverage portal), market makers and liquidity provider programs are just a few of them, "says Tham.

The case of AP's algorithmic journalism highlights the importance of media coverage in facilitating access to liquidity and attracting investor interest in publicly traded companies. Singapore's financial market media ecosystem and its journalistic capabilities lag behind competitive financial centers such as New York, London and Hong Kong. The use of algorithmic journalism is a measure that could strengthen the dynamism of the local investment scene and help revitalize the local stock market.

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