Swissquote launched last week the #DE30 Social Sentiment Index, a benchmark that summarises and evaluates the opinions expressed on social media regarding the German Dax via an algorithm powered by artificial intelligence (AI). SRP spoke to Peter Rosenstreich (pictured), head of market strategy at Swissquote, about how AI to build and customise indices to be used as underlying of index-linked products.

Practically any index can be customized to be used in index-linked products, according to Rosenstreich. "We are currently working on a solution that could lead to a tradable certificate but have no release schedule," says Rosenstreich. "However it's clear this sentiment index lays the ground work for a powerful investment tool."

According to Rosenstreich, this kind of algorithm can be used to either measure market sentiment but also to react to market news. "Hedge fund managers and traders have developed tools to measure specific events that can have a direct impact on particular assets but they haven't developed any tools that measure the wider market sentiment which is what ETFs are trying to do," says Rosenstreich. "The Swissquote #DE30 Social Sentiment Index has been launched to provide a reference to investors but our analysts have also compiled a basket of stocks that should benefit from the pro-European company-friendly policies of the two major German parties. These are investable assets that can be deployed on an investable and tradable index."

Monetising this kind of strategy does not imply a big jump when you can leverage an algorithm powered by AI, according to Rosenstreich. "The challenge is to find the sentiment around particular risk-on / risk-off assets that can be then wrapped in a structured product or similar instrument," he says. "It is easy enough to develop an index measuring the sentiment around the German election than an investable strategy around that sentiment but AI is providing new tools to measure and identify trends in the investment process."

Investors and product providers don't need to talk to traders or issuers anymore to get a sense of the market sentiment around a particular development and "this in itself can help can help to make an informed decision around an investment product", according to Rosenstreich.

"At the moment this kind of tool is very much focused on individual events (US election, Brexit) but there is no reason to consider the development of investable/tradable indices on the back of this kind of sentiment index," says Rosenstreich. "Assets that can be impacted by those developments can be selected on the basis of that sentiment and then build an index offering exposure to those assets as well."

Rosenstreich believes AI is opening up new possibilities around investment products and Swissquote bank wants to capitalise and promote this "huge opportunity" for the structured products market "because it can bring an active management angle to a passive investment set up".

"The ETF market is showing signs of congestion as everything seems to be already sliced and diced, and investors don't seem to be getting anything new," says Rosenstreich. "With AI we are entering a new phase were passive strategies don't have to be directional any more. The days of long-only investing are coming to an end."

According to Rosenstreich, valuation on stocks is quite high and the potential upside keeps getting smaller. "Investors now need multi assets that can deliver value and structured products can provide that kind of exposure on a number of formats (capital protection, reverse convertible, autocalls...), and provide alternatives to areas of the market that seem increasingly crowded," says Rosenstreich, adding that there is increasing evidence that online activity in the short term can also predict market direction.

"Historically sentiment has been a critical driver of prices and generally only experience could provide the trader with an edge," says Rosenstreich. "But deep analytics are increasingly able to generate a sentiment that is also quantifiable."

Investors are using the internet to inform themselves in real time and trying to define their feeling around particular assets and prices, and get analytics to get a measurement of that, according to Rosenstreich. "Over the last ten years there has been a lot of talk around risk-on and risk-off, and the need to measure that sentiment has increased and that's why these algorithms are taking off," he says. "Our new AI tool can evaluate social media to measure investor sentiment about the German Dax stock index and the tone around certain assets. I think this is a reflection of how the market analytics have evolved."

The #DE30 Social Sentiment Index is the latest addition to Swissquote Bank which has been developing a number of recent initiatives for structured products, including its Themes Trading tool to navigate the market more efficiently and a roboadvisory service as a complement to its structured products offering. The Swiss bank has a stake on the Swiss Dots' OTC platform which launched in 2012 in partnership with UBS and Goldman Sachs, as an alternative to the Six Swiss Exchange, and includes Deutsche Bank and Commerzbank as issuers, as well as Vontobel which joined earlier this year.

SRP data, which captures the majority of products transacted on an OTC basis in Switzerland shows that issuance in Switzerland stood at 243,829 products, worth an estimated €17.8bn by year end 2016, whereas this year's issuance stands at 151,678, worth an estimated €11bn.

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