Increased volatility in the stock of O’Reilly Automotive (ORLY) in the last two days while the name O’Reilly was trending in the news raises questions about the effectiveness of social media sentiment algos and their perils.
There is a small probability that the two events are unrelated and the stock of O’Reilly Automotive (ORLY) rallied in the past two days because of normal market activity but this happening while the name O’Reilly was trending in Twitter and social media raises some questions about what is really happening in Wall Street. What are the risks from dumb algos taking over Wall Street?
Yesterday, the stock rallied as much as 3% from the previous close. It appears that some market participants realized the irrational behavior and sold for quick profit. The stock closed up 1.1% on the day.
This is not the first time that social media sentiment algos that are supposed to be the state-of-the-art in AI implementations go haywire. In Chapter 8 of my book “Fooled By Technical Analysis” I mention a similar situation that was actually the first time that this anomalous behavior was detected.
“The analysis of billions of text messages can result in spurious correlations that are hard to detect. A notorious spurious correlation emerged in 2011 when it was found that when a famous actress was in the news, a company with the same name would exhibit strange price action behavior.”
Now, I think the time has come that these quants playing with algos get their act straight if this is confirmed as a faulty signal. Maybe Type-I errors cost less than Type-II errors in longer-term but they are playing with the stock of a company. This is not the same thing as a failed indicator signal; it is rather due to a dumb algo. Many of these dumb algos can pose significant left tail risk on the market.
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