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Accidental entrepreneurs find success predicting stock market
Kelly Foss
The  Afinin team, Dr. Garnett Wilson, Dr. Wolfgang Banzhaf and Derek Leblanc.

What do you do if your temporary job in academia is coming to an end? Start a company. Or, at least that’s what some do. Dr. Garnett Wilson, a former post-doctoral fellow in the Department of Computer Science, found himself to be an accidental entrepreneur. He had been hoping to stay on as faculty when his fellowship came to end, but as the time approached there were no available vacancies on faculty.

“He was working with me as a postdoctoral fellow on a project with Verafin Inc., a company founded to investigate money transaction verification and fraud detection for the banking industry,” explained Dr. Wolfgang Banzhaf, current acting head of the Department of Computer Science. “That got us to thinking, why don’t we take our genetic programming and machine learning backgrounds, which we were using to predict and trace fraud, to predict time series in the stock market?”

Time series analysis uses stock market data to forecast future behavior of the price of stocks and commodities. So, Drs. Banzhaf and Wilson did just that. They developed a software later named Zenquant which, when tested, predicted correctly whether a stock price would go up or down for more than 60 per cent of the time.

“That meant it wasn’t just guessing – we had really captured something,” said Dr. Banzhaf. “Keep in mind we are just using the current price and volume of the stock to predict future behavior and not fundamental data about the company, which we feel is already reflected in the price.”

The pair took their work to Dave King, president and CEO of Genesis Group. Genesis works with faculty and students at Memorial University to identify, evaluate, protect and commercialize innovative technologies arising from research at the university.

“David brought a financial advisor to a meeting with us and that person was very positive and encouraged us to continue with the project,” said Dr. Banzhaf. “In the end we decided to form a company and not patent the software, but to make it proprietary and protected as a trade secret.”

The company, which they called Afinin Labs Inc., for Advanced Financial Intelligence Laboratories, has received support from a local angel investor, the Newfoundland and Labrador Angel Network, as well as from the provincial and federal governments through the Research & Development Corporation, ACOA, IBRD, and the National Research Council of Canada. Development in the company has continually improved the accuracy of the software compared to the earlier prototype.

“Usually when something comes out of a university it’s not really market ready,” said Dr. Banzhaf. “Genesis was very supportive in helping to get us there. They gave us rooms in their facility and seconded staff from their team to help us get the company off the ground.”

In exchange, Memorial, through Genesis, was given a 20 per cent share in the company. A bank has tested the duo’s software and they are now in talks with hedge fund managers to apply the system. Dr. Banzhaf says the only problem is the pair never meant to work with the ‘big guys.’

“The original idea was to have this be a tool for individual investors,” said the professor. “We wanted to benefit the little guy and we were very disappointed when we saw that for most small investors the margin is so small that it gets eaten up by fees. So you can’t use this software on a small portfolio, unfortunately. It only works for high volumes.”

In the end, Dr. Banzhaf says Dr. Wilson managed to carve out a little niche for himself and he encourages other graduate students in Computer Science to consider his example.

“It shows you can find ways to stay here in Newfoundland and Labrador,” he said. “It’s not easy. There are certainly ups and downs. But you can do it and that’s the key message.

“Nobody cares where we are located provided we can access the data and computers we need to run our algorithms on. Times have changed. This can be done everywhere now.”

Dr. Banzhaf says the pair has already hired one graduate from the computer science program, Derek Leblanc, and hopes to expand and hire more students in the future.

“Income needs to be generated first, but then, yes, if we’re successful we want to be good citizens and not forget our origins.”

 

May 1st, 2013

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