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Crowdsourcing investment research: Capital Market Taxonomy

Posted By John Schroy On 29th April 2009 @ 11:13 In Capital Flow Analysis, Technology | 1 Comment

In this article, I continue the discussion of the crowdsourcing of investment research.

See: [1] Crowdsourcing investment research: opportunities in OSINT and [2] Free information and the Efficient Market Hypothesis

New Technology

Modern investment research, at least as applied in the [3] Capital Market Wiki Project, extends far beyond the 1930 techniques described in the classic [4] Graham and Dodd’s Security Analysis.

Because of the vastly increased complexity of investment markets, securities research now needs to encompass not only the terms and conditions of individual securities, but the laws, rules, and regulations that that govern issuers and the institutions where the securities are traded, cleared, and settled, the legal jurisdictions where issuers operate, taxation, accounting rules, operational techniques, related derivatives, and much more.

The “World in a Grain of Sand” Approach

The Capital Market Wiki Project adopts what is called the [5] “WIAGOS Approach”, an acronym derived from William Blake’s poem,

To see a World in a Grain of Sand
And a Heaven in a Wild Flower,
Hold Infinity in the palm of your hand
And Eternity in an hour.

The WIAGOS Approach: To see the world in a grain of sand ...

The WIAGOS Approach recognizes that today there is much more information available than most of us can research alone, while competitive advantage in security analysis depends upon being able to get at more relevant information than the next guy.

WIAGOS means that if you start researching one security and keep digging, you’ll sooner or later end up researching the whole market — if you live long enough and have enough people to help you.

To study a closed-end investment fund (a relatively simple security), one would need to know about the fund corporation, the common and preferred shares issued by the fund, the various types of revenue-enhancing or risk abatement techniques employed (leverage, securities lending, diversification, interest rate swaps, and so forth), the legal jurisdiction that governs the fund, the exchange where the securities are listed and the listing and trading rules, the government agencies regulating the fund, the accountant, law firm, custodian, and other supporting institutions relevant to the fund, similar details on every security held in portfolio, industry data on the various industrial classifications held in portfolio, the indices against which the fund is bench-marked, the management company, the firm’s brokers, clearing agents, and securities lending intermediaries, tax and corporate laws governing operations, and the various investment strategies and theories employed by the fund. See: [6] NRO fund in Capital Market Wiki.

If a competing investor knows all this information, and you only know what you read in Standard & Poor’s — you’re at a disadvantage.

Obviously, with such a huge volume of information and many people trying to work together to get at it, there needs to be a method to deal with the virtually unlimited sea of data. This is where [7] Capital Market Taxonomy comes in handy.

What is Capital Market Taxonomy?

Taxonomy is a method of classification and [8] Capital Market Taxonomy is a method of organizing information about financial markets.

In [9] Capital Market Wiki, the field of information covered by the term “capital markets” is defined quite broadly, thus:

‘Capital and financial markets include those areas of economic activity that are related, directly or indirectly, to short or long-term techniques, methods, and strategies for the investment of assets or savings, the instruments used in such investment, and the institutions involved in creating such instruments, either by borrowing and lending to users of funds, or by underwriting, creating, and marketing investment or other securities, or by supporting secondary trading markets in securities, derivatives, or other financial instruments, or by legislating, regulating, supervising, taxing, protecting, influencing, assisting, or governing such markets and activities, or by providing supporting professional or other services that contribute to such activities.’

Capital Market Taxonomy (CMT) is a method of parsing financial information. It has two main functions.

  1. Database organization: CMT is a formally defined series of tags or classifications that allow information related to capital markets to be stored digitally in a way as to be available for efficient retrieval when needed. With CMT (as implemented on Capital Market Wiki) you can retrieve information by asking questions like, “On which exchanges are derivatives base on Black Pepper traded and in what currency are such contracts settled?” or “Make a list of preferred shares under Japanese or Hong Kong law that are issued by companies in the hotel or resort business”.
  2. Avoiding redundancy in crowdsourcing: If many people are to cooperate in financial research, it is useful to have a way to sort information into neat “compartments” so that each type of information has a location where researchers may work together, avoiding redundancy, allowing researchers to work on the same task knowing that someone else is not repeating the same task elsewhere.

    The idea is to break up a “blob” of information and separate it into categories, so that each category of knowledge has its place and can be quickly found by others working on the project.

Capital Market Taxonomy allows efficient sorting of information

In April 2009, Capital Market Taxonomy as implemented on Capital Market Wiki consisted of [10] 4,848 formally defined namespaces, categories, attributes, and relations — far more than anyone ([11] other than one suffering from the savant syndrome) could possibly remember.

However, CMT technology makes it possible for analysts to deal with the complexities of financial information effectively by remembering only four superclasses — most information classification is done by the software through standard input forms.

The four Capital Market Taxonomy super-classes

Capital Market Taxonomy is quite easy to use and understand.

All information relevant to capital markets is recorded as “articles” in a wiki encyclopedia. Each “article” deals with a topic that falls into one of four classifications.

These are the four super-classes:

  1. [12] Markets: Articles about legal jurisdictions that govern some aspect of capital markets. These can be areas of authority like nation-states, sub-national entities or monetary unions. For example, there might be articles on [13] Nepal, [14] United Kingdom, the [15] State of Maryland, or the [16] City of Naples, Florida.
  2. [17] Institutions: Articles about institutions that play some role in capital markets, such as issuers, investment banks, financial regulators, courts, auditing firms, and so forth. For example, there might be articles on the [18] New York Stock Exchange, [19] Neuberger Berman Real Estate Securities Income Fund, the [20] Financial Services Authority (UK), or [21] Kliring Penjaminan Efek Indonesia.
  3. [22] Instruments: Articles about a specific security or type of security, such as equities, bonds, preferred stocks, options or futures. This category also included “[23] referentials“, which are the underlying values on which securities may be based, such as commodities, currencies, indices, or interest rates. For example, there might be articles about a [24] specific common stock, a [25] specific futures contract, or articles about [26] soybeans, or [27] LIBOR which are “referentials” for derivatives.
  4. [28] Operations: Articles about methods, procedures, behavioral constraints, and theories that explain how capital and financial markets function. This includes laws, regulations, and every type of operational procedure. For example, there might be an article about the [29] Investment Company Act of 1940 (US), [30] Auction Market Preferred Share Rate Determination, the [31] Efficient Market Hypothesis, or [32] Regulation of Insider Trading (Austria).

The practical effect of Capital Market Taxonomy is to break up a topic into different articles in an orderly fashion. For example, an article about a municipal bond issued by the city of Naples, Florida might have one article on the bond (in the Instruments category), and another about the city (in the Markets category). The content of each article is, to a certain degree, standardized, based on [33] recommended formats. Therefore, the article on the city “Naples, Florida”, can be expected to contain information about municipal finances, whereas the article about the specific bond can be expected to describe the terms and conditions of that particular bond.

Avoiding redundancy and fostering specialization

The purpose of Capital Market Taxonomy is to permit efficient crowdsourcing of financial research.

In the example about a municipal bond issued by the city of Naples, Florida, we would have at least one article about the bond and another article about the city. If Naples, Florida has 20 different issues of bonds, there still would be only one article on the city itself. There might also be an article in the “Operations” category describing US tax law regarding municipal securities, but this one article would serve not only all 20 bonds issued by Naples, Florida but also all other US municipalities.

By linking articles together with “Infoboxes”, and by using “Capital Market Taxonomy”, readers can find relevant facts needed to understand the context of any article. It is not necessary, for example, to repeat the technical details of US tax treatment of municipal bonds in every article describing a specific instance of a municipal bond.

Linked compartmentalization of information makes it easier to focus specialized skills on certain topics. In the example about Naples municipal bonds, we might have an article about US tax treatment of municipal securities, written by tax experts, with another article on Naples, Florida, written by an expert in municipal finance.

Automation of Capital Market Taxonomy

As mentioned above, Capital Market Taxonomy involves over 4,800 semantic namespaces, categories, attributes, and relations, each with a formal definition. However, a researcher needs to remember only the four super-categories into which information is classified: Markets, Instruments, Institutions, and Operations.

How are the other 4,800 or so classifications applied?

The method of classification is actually quite simple. For each type of article, a form with check-boxes and automatic fields is presented by the wiki software. After spending a few minutes going through the form, the information is automatically classified in the semantic database.

Much of the classification is programed to go on behind the scenes. For example, by indicating that a bond is under the jurisdiction of the laws of Indonesia, the article will automatically be classified being in the categories Southeast Asia, and Asia and the Pacific.

The automated form also creates an “Infobox” for each article that allows readers to quickly find related articles or surf the encyclopedia, using [34] semantic searching.

I’ll go into how OSINT techniques for investment analysis may be used by fund managers and investment bankers in a future article.

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URL to article: http://capital-flow-analysis.com/capital-flow-watch/crowdsourcing-investment-research-capital-market-taxonomy.html

URLs in this post:
[1] Crowdsourcing investment research: opportunities in OSINT: http://capital-flow-analysis.com/capital-flow-watch/crowdsourcing-investment-research-opportunities-

[2] Free information and the Efficient Market Hypothesis: http://capital-flow-analysis.com/capital-flow-watch/free-information-and-the-efficient-market-hypoth

[3] Capital Market Wiki Project: http://www.capital-market-wiki.org/wiki/index.php?title=Introduction
[4] Graham and Dodd’s Security Analysis: http://www.amazon.com/Graham-Security-Analysis-Sidney-Cottle/dp/B001DYD0I6%3FSubscriptionId%3D0EMV44

[5] “WIAGOS Approach”: http://www.capital-market-wiki.org/wiki/index.php?title=Help:The_WIAGOS_Approach
[6] NRO fund in Capital Market Wiki: http://www.capital-market-wiki.org/wiki/index.php?title=Institutions:Neuberger_Berman_Real_Estate_Se

[7] Capital Market Taxonomy: http://www.capital-market-wiki.org/wiki/index.php?title=Capital_Market_Taxonomy#What_is_Capital_Mark

[8] Capital Market Taxonomy: http://www.capital-market-wiki.org/wiki/index.php?title=Help:Taxonomy
[9] Capital Market Wiki: http://www.capital-market-wiki.org/wiki/index.php?title=Introduction
[10] 4,848 formally defined namespaces, categories, attributes, and relations: http://www.capital-market-wiki.org/wiki/index.php?title=Help:Semantic_Classification
[11] other than one suffering from the savant syndrome: http://en.wikipedia.org/wiki/Idiot_savant
[12] Markets: http://www.capital-market-wiki.org/wiki/index.php?title=Category:Markets
[13] Nepal: http://www.capital-market-wiki.org/wiki/index.php?title=Markets:Nepal
[14] United Kingdom: http://www.capital-market-wiki.org/wiki/index.php?title=Markets:United_Kingdom
[15] State of Maryland: http://www.capital-market-wiki.org/wiki/index.php?title=Markets:Maryland_(US)
[16] City of Naples, Florida: http://www.capital-market-wiki.org/wiki/index.php?title=Markets:Naples%2C_Florida_(US)
[17] Institutions: http://www.capital-market-wiki.org/wiki/index.php?title=Category:Institutions
[18] New York Stock Exchange: http://www.capital-market-wiki.org/wiki/index.php?title=Institutions:New_York_Stock_Exchange_(NYSE)#

[19] Neuberger Berman Real Estate Securities Income Fund: http://www.capital-market-wiki.org/wiki/index.php?title=Institutions:Neuberger_Berman_Real_Estate_Se

[20] Financial Services Authority (UK): http://www.capital-market-wiki.org/wiki/index.php?title=Institutions:Financial_Services_Authority
[21] Kliring Penjaminan Efek Indonesia: http://www.capital-market-wiki.org/wiki/index.php?title=Institutions:Kliring_Penjaminan_Efek_Indones

[22] Instruments: http://www.capital-market-wiki.org/wiki/index.php?title=Category:Instruments
[23] referentials: http://www.capital-market-wiki.org/wiki/index.php?title=Category:Referentials
[24] specific common stock: http://www.capital-market-wiki.org/wiki/index.php?title=Instruments:Neuberger_Berman_RE_Securities_I

[25] specific futures contract: http://www.capital-market-wiki.org/wiki/index.php?title=Instruments:Gold_Futures_(JFX)
[26] soybeans: http://www.capital-market-wiki.org/wiki/index.php?title=Instruments:Soybeans
[27] LIBOR: http://www.capital-market-wiki.org/wiki/index.php?title=Instruments:BBA_LIBOR
[28] Operations: http://www.capital-market-wiki.org/wiki/index.php?title=Category:Operations
[29] Investment Company Act of 1940 (US): http://www.capital-market-wiki.org/wiki/index.php?title=Operations:Investment_Company_Act_of_1940_(U

[30] Auction Market Preferred Share Rate Determination: http://www.capital-market-wiki.org/wiki/index.php?title=Operations:Auction_Market_Preferred_Share_Ra

[31] Efficient Market Hypothesis: http://www.capital-market-wiki.org/wiki/index.php?title=Operations:Efficient_Market_Hypothesis
[32] Regulation of Insider Trading (Austria): http://www.capital-market-wiki.org/wiki/index.php?title=Operations:Regulation_of_Insider_Trading_(Au

[33] recommended formats: http://www.capital-market-wiki.org/wiki/index.php?title=Help:Recommended_Format
[34] semantic searching: http://www.capital-market-wiki.org/wiki/index.php?title=Help:Semantic_search
[35] capital market taxonomy: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=capital-market-taxonomy
[36] Graham & Dodd: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=graham-%26-dodd
[37] security analysis: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=security-analysis
[38] Technology: http://capital-flow-analysis.com/capital-flow-watch/index.php?tag=technology
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