Using crowd-sourced earnings

estimates for automated trading

www.deltixlab.com
2
The Main Thesis
Earnings estimates from independent analysts serve as a basis for
prediction of overnight market price movement, to generate alpha in US
equities.

2
www.deltixlab.com
3
Overall methodology
Sources of data:
Estimize draws estimates from a diverse community of individuals (crowd-
sourcing);
Historical bars of 1min periodicity for S&P500 ticker universe.

Technology Deltix QuantOffice/QuantServer software:
TimeBase;
QuantOffice.

Major steps of the research:
Creation of initial setup;
Analysis of Estimize data;
Review of approaches suggested by Estimize, implementation of these
approaches by means of QuantOffice Strategy Designer;
Investigation of main hypothesis which relies on earnings surprises we can
exploit to generate excess returns;
Creation and backtesting of strategy generating trading signals based on Estimize
estimates.
3
www.deltixlab.com
4
Overview of Estimize Data in TimeBase
4
www.deltixlab.com
Company reports
Ticker;
Release date and time;
Release id;
Fiscal year and quarter;
Actual EPS and revenue;
Wall Street EPS and Revenue forecast.

5 5
www.deltixlab.com
Estimize estimates
Ticker;
Creation time;
Estimate_id;
Release_id;
Estimize EPS and revenue forecast.
6
Historical Bar1min Data
Historical bars of 1min periodicity for S&P100 ticker universe;
Total volume of data used in research is approximately 20,000,000
messages.
6
www.deltixlab.com
7
Estimize Strategy Suggestions
7
www.deltixlab.com
Parameter All Trades Long
Trades
Short Trades
Net Profit/Loss 3,526.05 4,161.70 -635.65
Total Profit 15,001.30 12,980.15 2,021.15
Total Loss -11,475.25 -8,818.45 -2,656.79
Cumulated Profit % 3.53 % 4.16 % -.64 %
Max Drawdown -1,374.99 -1,487.87 -953.00
Max Drawdown % -1.36 % -1.46 % -.95 %
Max Drawdown Date 4/18/2013 4/18/2013 10/21/2013
Return/Drawdown Ratio 2.56 2.80 -0.67
Drawdown Days % 74.41 % 69.73 % 96.09 %
Max Drawdown
Duration
146 133 362
CAGR 1.78 % 2.09 % -.32 %
Sharpe Ratio 1.26 1.34 -0.56
Annualized Volatility 1.41 1.56 0.58
Sortino Ratio 1.89 2.07 -0.74
UPI 0.30 0.36 -0.04
Information Ratio 1.26 1.34 -0.56
Optimal f 89.27 85.74 -96.86
All Trades # 440 360 80
Profitable Trades Ratio 0.55 0.58 0.45
Winning Trades # 244 208 36
Losing Trades # 196 152 44
Average Trade 8.01 11.56 -7.95
Average Winning Trade 61.48 62.40 56.14
Average Losing Trade -58.55 -58.02 -60.38
Avg. Win/ Avg. Loss
Ratio
1.05 1.08 0.93
Average Profit per Share 0.04 0.06 -0.03
Max Conseq. Winners 9 12 6
Max Conseq. Losers 7 8 10
8
Estimize Strategy Suggestions
8
www.deltixlab.com
Parameter All Trades Long
Trades
Short Trades
Net Profit/Loss 2,247.09 299.13 1,947.95
Total Profit 12,561.88 809.73 11,752.15
Total Loss -10,314.80 -510.59 -9,804.20
Cumulated Profit % 2.25 % .30 % 1.95 %
Max Drawdown -1,682.98 -223.26 -2,258.80
Max Drawdown % -1.63 % -.22 % -2.19 %
Max Drawdown Date 11/6/2012 5/8/2013 11/6/2012
Return/Drawdown
Ratio
1.34 1.34 0.86
Drawdown Days % 94.14 % 66.41 % 93.95 %
Max Drawdown
Duration
363 232 363
CAGR 1.13 % .15 % .98 %
Sharpe Ratio 0.63 0.59 0.53
Annualized Volatility 1.81 0.26 1.86
Sortino Ratio 1.42 0.91 1.12
UPI 0.08 0.08 0.05
Information Ratio 0.62 0.59 0.52
Optimal f 34.55 232.73 28.37
All Trades # 439 24 415
Profitable Trades Ratio 0.50 0.71 0.49
Winning Trades # 221 17 204
Losing Trades # 218 7 211
Average Trade 5.12 12.46 4.69
Average Winning Trade 56.84 47.63 57.61
Average Losing Trade -47.32 -72.94 -46.47
Avg. Win/ Avg. Loss
Ratio
1.20 0.65 1.24
Average Profit per
Share
0.02 0.06 0.02
Max Conseq. Winners 12 7 12
Max Conseq. Losers 8 2 14
9
Market Over-reaction Hypothesis
Company EPS and revenue report happens overnight:











Using Estimize data as a basis for overnight market movement prediction (the
holding period is about 19 hours).
9
www.deltixlab.com
10
Estimize Estimates Distribution
The average number of estimates
per reporting period for a ticker
universe of the S&P100:

Directionality in estimates?
10
www.deltixlab.com
Ticker Number Ticker Number Ticker Number
AAPL 186.57 MON 10.43 BMY 4.13
GOOG 70.62 HON 10.33 FCX 4.00
AMZN 53.10 JNJ 9.64 APC 3.88
NKE 40.22 CVS 9.23 MET 3.80
SBUX 33.00 WMT 9.15 UNP 3.78
EBAY 32.85 PG 9.00 WAG 3.67
INTC 30.46 FDX 8.50 RTN 3.43
DIS 28.00 CL 7.50 UPS 3.43
JPM 27.56 UNH 7.50 LLY 3.36
CSCO 25.91 AIG 7.44 AEP 3.33
IBM 24.85 MRK 7.25 DOW 3.00
F 24.45 GILD 7.11 NOV 2.75
MSFT 22.92 ABT 6.78 NSC 2.75
V 22.64 HAL 6.67 MDT 2.67
ORCL 21.30 AMGN 6.63 SO 2.67
QCOM 19.83 BAX 6.57 MMM 2.63
HPQ 19.73 EMR 6.57 MDLZ 2.33
MA 18.38 PEP 6.50 UTX 2.33
HD 17.36 BA 6.44 DVN 2.25
DELL 16.71 T 6.44 EXC 2.25
EMC 16.25 LMT 6.29 COF 2.09
WFC 16.00 CVX 6.09 COP 2.00
LOW 15.88 MS 5.83 MO 2.00
GS 15.62 PFE 5.50 OXY 2.00
TGT 14.56 VZ 5.13 BK 1.88
COST 13.82 TWX 5.00 APA 1.75
TXN 13.77 SLB 4.78 PM 1.50
BAC 13.58 AXP 4.69 WMB 1.00
C 13.00 USB 4.50 ALL 0.00
MCD 13.00 XOM 4.40 BRK.B 0.00
CAT 11.31 DD 4.25 SPG 0.00
GE 11.11 ACN 4.22
KO 10.64 GD 4.20
- Estimize EPS Estimate
- Mean Estimize Estimate
11
Short Term and Long Term Period

11
www.deltixlab.com
12 12
Directionality in Estimates
Optimistic:




Pessimistic:




Neutral


www.deltixlab.com
13
Trading Hypothesis

13
Earnings surprise leads to market over-reaction;

Relatively higher optimism in the short term forecast compared to the long-term
forecast usually leads to negative price movement after the actual earnings
announcement, as the announcement will probably miss the short term expectation,
and the stock price will fall.

On the other hand, where long term optimism is followed by short term, pre-
announcement, pessimism then this predicts positive stock price movement.

www.deltixlab.com
14
Trading Algorithm
14
www.deltixlab.com
15
PnL Curve: GOOG
15
www.deltixlab.com
16
PnL Curve and Statistics

16
Trade on S&P100,
Back-testing period:
from Dec 26, 2011 to Dec 31, 2013.

www.deltixlab.com
Parameter All Trades Long
Trades
Short
Trades
Net Profit/Loss 25,947.52 15,778.04 10,169.47
Total Profit 90,871.62 60,417.49 30,454.13
Total Loss -64,924.10 -44,639.44 -20,284.66
Cumulated Profit % 25.95 % 15.78 % 10.17 %
Max Drawdown -2,795.19 -2,062.33 -2,342.88
Max Drawdown % -2.39 % -1.86 % -2.12 %
Max Drawdown Date 1/28/2013 1/24/2013 7/31/2013
Return/Drawdown Ratio 9.28 7.65 4.34
Drawdown Days % 67.13 % 77.43 % 74.65 %
Max Drawdown
Duration
62 134 82
CAGR 12.61 % 7.83 % 5.11 %
Sharpe Ratio 2.40 1.73 1.49
Annualized Volatility 5.25 4.53 3.44
Sortino Ratio 4.17 2.95 2.70
UPI 1.07 0.64 0.43
Information Ratio 2.21 1.63 1.45
Optimal f 45.77 38.22 43.32
All Trades # 607 447 160
Profitable Trades Ratio 0.55 0.55 0.55
Winning Trades # 333 245 88
Losing Trades # 274 202 72
Average Trade 42.75 35.30 63.56
Average Winning Trade 272.89 246.60 346.07
Average Losing Trade -236.95 -220.99 -281.73
Avg. Win/ Avg. Loss
Ratio
1.15 1.12 1.23
Average Profit per
Share
0.20 0.17 0.26
Max Conseq. Winners 8 7 7
Max Conseq. Losers 6 6 5
17
Market Neutrality
17
www.deltixlab.com
18
PnL Curve and Statistics: $ neutral

18
Trade on S&P100,
Back-testing period:
from Dec 26, 2011 to Dec 31, 2013.

www.deltixlab.com
Parameter All Trades Long
Trades
Short
Trades
Net Profit/Loss 22,424.25 15,504.83 6,919.42
Total Profit 100,569.70 64,708.04 35,861.66
Total Loss -78,145.44 -49,203.20 -28,942.24
Cumulated Profit % 22.42 % 15.50 % 6.92 %
Max Drawdown -2,803.85 -2,518.20 -2,973.51
Max Drawdown % -2.45 % -2.15 % -2.87 %
Max Drawdown Date 1/28/2013 2/18/2014 8/21/2012
Return/Drawdown Ratio 8.00 6.16 2.33
Drawdown Days % 75.96 % 80.00 % 89.54 %
Max Drawdown
Duration
84 134 130
CAGR 10.13 % 7.12 % 3.24 %
Sharpe Ratio 2.04 1.59 0.88
Annualized Volatility 4.97 4.47 3.68
Sortino Ratio 3.42 2.66 1.43
UPI 0.76 0.52 0.18
Information Ratio 1.90 1.51 0.87
Optimal f 41.09 35.69 23.93
All Trades # 864 539 325
Profitable Trades Ratio 0.53 0.54 0.50
Winning Trades # 454 291 163
Losing Trades # 410 248 162
Average Trade 25.95 28.77 21.29
Average Winning Trade 221.52 222.36 220.01
Average Losing Trade -190.60 -198.40 -178.66
Avg. Win/ Avg. Loss
Ratio
1.16 1.12 1.23
Average Profit per
Share
0.13 0.15 0.11
Max Conseq. Winners 10 7 6
Max Conseq. Losers 6 6 6
19
PnL Curve and Statistics: beta neutral

19
Trade on S&P100,
Back-testing period:
from Dec 26, 2011 to Dec 31, 2013.

www.deltixlab.com
Parameter All Trades Long
Trades
Short
Trades
Net Profit/Loss 20,729.05 15,198.49 5,530.55
Total Profit 91,018.20 57,871.21 33,146.99
Total Loss -70,289.15 -42,672.71 -27,616.44
Cumulated Profit % 20.73 % 15.20 % 5.53 %
Max Drawdown -2,857.78 -2,131.02 -3,164.71
Max Drawdown % -2.51 % -1.92 % -3.08 %
Max Drawdown Date 1/28/2013 1/24/2013 7/26/2012
Return/Drawdown Ratio 7.25 7.13 1.75
Drawdown Days % 48.10 % 52.03 % 59.49 %
Max Drawdown
Duration
80 134 113
CAGR 6.86 % 5.11 % 1.91 %
Sharpe Ratio 1.68 1.41 0.61
Annualized Volatility 4.08 3.63 3.13
Sortino Ratio 2.84 2.38 0.95
UPI 0.65 0.50 0.12
Information Ratio 1.58 1.34 0.61
Optimal f 41.13 38.84 19.60
All Trades # 778 476 302
Profitable Trades Ratio 0.53 0.55 0.49
Winning Trades # 410 262 148
Losing Trades # 368 214 154
Average Trade 26.64 31.93 18.31
Average Winning Trade 222.00 220.88 223.97
Average Losing Trade -191.00 -199.41 -179.33
Avg. Win/ Avg. Loss
Ratio
1.16 1.11 1.25
Average Profit per
Share
0.14 0.17 0.09
Max Conseq. Winners 10 7 6
Max Conseq. Losers 7 6 6
Summary
Estimize estimates serve as a strong predictive factor of price directionality;
Estimize approaches were tested using QuantOffice strategy development
and back-testing functionality;
The relative optimism or pessimism of short term versus long term Estimize
estimates is a strong predictive factor of the price directionality after EPS
announcements;
Dollar-neutral and beta-neutral portfolios demonstrate that the achieved
effect is uncorrelated with the market.
On stocks in the S&P100, back-testing shows that the unhedged strategy has
an average Information ratio of 2.21 over the period 2012-2013, with a
stronger performance in 2012. Dollar-neutral and beta-neutral strategies
achieved Information Ratios of 1.90 and 1.58 respectively, which indicates
that the strategy does generate alpha.

www.deltixlab.com



Recordings of Deltix demonstrations
can be viewed at:

https://www.youtube.com/deltixtutorials

www.deltixlab.com