Investment and fund managers make their living trying to predict market trends. One industrious researcher went a step further and created a unique, proprietary software formula that can forecast the up or down movement of a single stock or market sector with 83 percent directional accuracy.

Matthew Rossi, founder, managing partner and chief research officer of MarketDNA, began by observing market trends and then set about creating a software capable of predicting stock movement based on the underlying derivative trading activity for a given stock.

“There’s a theory out in the investment community – coming primarily out of Wall Street – that options are a predictor of insider trading,” Rossi said, explaining that it was his curiosity to determine the truth behind this theory that prompted him to test, prove and then perfect it, even writing his graduate school thesis on the subject.

Rossi spent months gathering trading data and creating a program capable of consolidating that data. Over the next decade, he continued fine-tuning the software with over one hundred filters, to produce highly accurate and specialized research product that he named MarketDNA.

“It took ten to eleven years to get it from where I started – from theory to the perfection where we are today,” Rossi said.

“We had to do a tremendous amount of back-testing,” he explained. “We would look for our data to come through, and then we’d see XYZ Company get bought out and their stock go from 50 to 75. So, we would go back and test our filtering process, our data and our software to find out if we picked it up or not – and why or why not. Then, we’d research how to create additional, fine data points that would help us identify where that was before it actually happened based on the trading.”

Rossi added that through this process they’ve discovered that the software is even able to pick up on company acquisitions and company events before those announcements are made public. “It’s basically an event-driven methodology that captures new sales of an organization or a legal action against a company that’s going to impact their revenues and their earnings in the next quarter.”

As an example, Rossi described a scenario from a few years earlier when an eye drop manufacturer was investigated for the presence of carcinogens in their formula. Two weeks prior to the public announcement, MarketDNA flagged a spike in trading activity as employees saw the investigators come through the company and began trading in the put options.

“We picked up on the actual trading data and were able to notify our clients at that point to protect their positions or allow them to take a short position in the stock,” Rossi said, adding, “We are able to help people and portfolios really hold their position as opposed to being hurt by insider trading.” 

MarketDNA is specifically designed as a tool to help hedge fund managers and broker dealers selling both directly and through third parties into funds trading on large amounts of stock, including small, mid, or large cap stocks. The typical portfolio manager utilizing MarketDNA is overseeing anywhere from $200 million to billions in either the entire market or in market sectors, such as technology or finance.

“We present them with our actual research,” Rossi explained. “We show them our history and how we go about the process of creating the research. We go over our successes and our losses, too, and why we can never be 100 percent accurate, but how we are 83% accurate with our research over the last 6 years” According to Rossi, large hedge funds have very unique ways of distinguishing themselves from the overall market return. However, as their funds grow, it becomes increasingly difficult for them to add alpha. This is where MarketDNA can help set them apart from competing funds.

“We have a differentiating factor that no one else in the entire marketplace has,” he said, adding that their process has enabled managers to successfully add alpha to their portfolios.

In addition to the main MarketDNA product encompassing all equities, they also offer SectorDNA designed for those trading in a specific market sector, and VolatilityDNA that issues alerts when a volatile movement is anticipated. “Whether it’s going to move up or down, we don’t know,” Rossi said. “We’re just going to let you know that stock XYZ is going to move 10 to 20 percent in a matter of 14 to 15 business days.”

Being careful not to inundate clients on a minute-by-minute or tick-by-tick basis adds to the value of the MarketDNA service. “We send out a research note that’s ‘buy here; sell at this price,’ and we update them as it comes out,” Rossi said. “We send about 10 to 15 trades out per month.”

He also noted that, although the recession did a lot to eliminate some of the cheating that had been running rampant in the market, it did not affect the MarketDNA research process. If anything, he added that the recession gave them an opportunity to add breadth to their product. “It showed different ways to attack the marketplace, both on the short side and the long side,” Rossi said.
The greatest challenge he has faced so far, he noted, has been gaining exposure and getting people to accept new ideas for market research, largely because the old methods have been ingrained for over a hundred years.

“No one in the entire world has what we have top to bottom,” Rossi said, adding that he’s now looking to expand into international market research.

For more information, visit: www.marketdna.com