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Computers help share traders stay on top of their game. Dr Karl has found how one actor unwittingly helps them make a quick profit.

When computer algorithms used by stock traders detect Anne Hathway’s name, it can send the value of one company upwards (Source: Carlo Allegri/Reuters)

Now we normally think of Hollywood movies, and those who act in them, as providing purely entertainment. But Anne Hathaway is different. Whenever she hits the headlines, she also nudges up the share price of one of the biggest companies in the world.

It’s because of two separate factors. The first one is her surname, Hathaway. The second one is the stock market, and more specifically, both high frequency trading and analysis of market sentiment.

Let’s deal with high frequency trading first.

Back in the old days, trading stocks or shares was straightforward. The potential buyers and sellers would meet on the floor of the Stock Exchange and bargain with each other until they made a deal. But in 1998, the US Securities And Exchange Commission changed the rules so that electronic exchanges could compete with traditional institutions such as the New York Stock Exchange. All you needed was a computer.

Today, powerful computers can scan dozens of stock markets simultaneously, and can find trends in buying or selling – literally quicker than the human can blink. They then execute millions of ‘buy’ or ‘sell’ orders in less than a second. Typically, a high frequency trader would hold a stock for a very short time (seconds to hours), and might buy and sell that stock many times each day. They make only a tiny profit on each transaction, but they do tens of thousands of transactions each day.

The detractors of high frequency trading say that the speed and volume of the trades can distort the prices of stocks, and make financial markets less stable. They also say that the traders with the most powerful supercomputers exclude the ordinary investors, because they can enact the best deals more quickly. The high frequency traders counter that by saying they have cut trading fees, and have brought more competition to the markets.

Today, a handful of high frequency traders account for more than 60 per cent of all seven billion shares sold each day on the American stock markets. It’s very profitable.

So now let’s look at analysis of market sentiment.

A very important way for investors to work out whether to buy or sell shares in any particular company is to read the Chief Executive’s speeches, company annual reports, newspaper articles, and so on. But it would take a person a long time to do this. So computer programs (or algorithms) have been written to trawl through all the relevant literature, looking for positive or negative feelings about any specific stock. The computer doesn’t try to understand the article – it’s interested only in finding positive or negative sentiments that relate to the companies it’s interested in.

So how does this all link back to the actor Anne Hathaway?

It turns out that one of the wealthiest men on the planet, Warren Buffet, has a very wealthy company called Berkshire-Hathaway. Every year, it’s usually in the list of the top ten public companies in the world. Over the last 44 years, the company has grown by over 20 per cent each year, has revenue of more than US$140 billion each year, and employs more than one quarter of a million people.

A single share in Berkshire-Hathaway costs more than US$120,000. And every time that Anne Hathaway makes headlines, the stock price of Warren Buffett’s Berkshire-Hathaway climbs up. It doesn’t matter whether it’s the opening of her latest movie or if she co-hosts the Oscars – Berkshire-Hathaway climbs a few per cent.

So let’s put it all together.

Anne Hathaway has a good reputation, and her movies usually do well. These movies include Brokeback Mountain, The Devil Wears Prada and Alice in Wonderland. So the newpaper reports involving the name Hathaway are usually positive. The analysis of market sentiment computer algorithms link Anne Hathaway with Berkshire-Hathaway. The analysis of market sentiment alogorithm feeds data into the high frequency trading algorithm, which then buys some Berkshire-Hathaway stock – even at more than $120,000 for each share.

On one hand, the high frequency traders make their wealth by methods that add no value to our society – that only line their own pockets. On the other hand, Warren Buffett has always looked for companies that have strong fundamentals and are in business for the long term, not the quick profit. He has pledged to give away 99 per cent of his wealth to charity. He lives in Omaha, and is fondly called the ‘Oracle of Omaha’.

How funny that the high frequency traders can’t tell the difference between the oracle and the actress.

Tags: actor, markets, stockmarket, computers-and-technology, mathematics

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Published 12 June 2012

2012 Karl S. Kruszelnicki Pty Ltd

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12 Jun 2012 4:52:07pm

Interesting, so if someone was able to create thousands of websites and feed into them from one location, with either positive or negative comments about a certain stock they could theoretically change the value of that stock?

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13 Jun 2012 12:35:29pm

I’m going to create a company named Jolie-Pitt-Rhianna-Bieber. Will that work?

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15 Jun 2012 8:13:23am

Going by the article, no. You would be better creating a company called Princess Mary or Princess Kate – as they don’t have many negative articles written about them. Rhianna and Bieber do and to a less extent Jolie-Pitt do too

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17 Jun 2012 4:45:09pm

It’s all very sad. People make enormous amounts of money through computer programs that are basically all guessing in the same direction.

Then when they finally realise that they’ve been guessing wrong (for instance, those new home owners are never going to be able to pay off their mortgages), the state (i.e. taxpayer) has to bail them and the financial system out of the mess.

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19 Jun 2012 8:30:21pm

The trade, stock and commodity markets are almost entirely bookie joints on public sentiment. You could come up with a product or process that would eliminate cancer and, if the right people chose not to invest in your company, your stock would flatline. It is measured in opinion, not facts, roll the dice and ope everyone else is hoping for the same number. That, in these days of computer-assisted trading, something like this happens does not amaze me at all.

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