Predicting US Equity Stock Price Movements Using Swaps Data and AI
Finadium
March 2024
Artificial intelligence (AI) is being applied to stock market analysis both as a predictive tool and to support human qualitative decision making. At the same time, US OTC equity derivatives (Total Return Swaps, Portfolio Swaps and others) remain a largely hidden part of the market that can sometimes precede future price movements in underlying securities. Combining a cleaned US equity swaps data file with AI tools for fast analysis can yield opportunities for traders.
This report presents a methodology for how AI can quickly aggregate qualitative information to support the identification of directionality of swaps positions and to capture whether swaps interest has already played out in equity market prices. For mid or small cap securities and meme stocks, this may close a feedback loop that starts with hedge fund reporting, plays into social media, then ends with swaps and equity trading.
The methodology is not ready for full automation – humans are still necessary in the process – but the ability for AI to collect information and humans to review it speeds up the market analysis process considerably. We expect that more AI tools and methodologies will become prevalent in the market as proficiency and trust in the results expand.
This report should be read by traders in equity markets with access to either DTCC’s Security-Based Swaps raw data file and the ability to clean it, or Finadium’s cleaned T+1 file. It is not necessary to participate in the OTC equity swaps market to derive data from this published information. OTC swaps traders including hedge funds, dealers and newly emerging agency swaps desks may also find insights in the methodology that could assist with trade strategy.
Table of Contents
- Executive Summary
- Using AI In Securities Analysis
- – Methodology
- Three Swaps Examples with ChatGPT
- – Reliance Steel
- – Mastercard
- – Ingredion
- Expanding the Methodology to Real-World Applications
- About Finadium LLC