Finadium: Predicting US Equity Stock Price Movements Using Swaps Data and AI

This report presents a methodology for how artificial intelligence (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.

AI offers substantial opportunities for driving efficiencies in securities analysis, primarily by sifting through and distilling large volumes of information to allow a human or computer to identify key points. At the same time, the OTC equity derivatives markets remain complex and relatively opaque, even with the publication of databases like the DTCC’s Security-Based Swaps (SBS) Data Repository on US OTC swaps positions. By combining these two sources of information, new insights may appear that programmatically identify trading opportunities before they play out in the underlying equity markets.

The OTC equity swaps markets remain an important venue for hedge funds and dealers to capture economic exposure to the upside and downside of equity price movements without buying on margin or short selling in the open market. According to our cleaned data, between $2 billion and $5 billion in US equity ISIN OTC swaps are traded daily with volumes rising above $10 billion on select days. While this is a very small fraction of the hundreds of billions traded daily on major equities exchanges, OTC equity swaps are fundamentals-based trades that can move the markets as opposed to algorithmic trades looking to capture sub-basis point spreads during the trading day, or investments in passive tracker funds.

The methodology in this report 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.

A direct link for Finadium subscribers to this report is

For non-subscribers, more information is available here.

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