4.2. Alpha, the ARPANET, and the Internet

There is another place to look besides the speed race and arbitrage strategies. There is a huge amount of information in prices and quantitatively derived measures, but that is not all the information we have about stocks. Some is in the form of news, research, and other textual sources. Having tomorrow's newspaper, even without the stock pages, would be valuable to investors.

We've seen how innovation on quantitative information can produce alpha. How about innovation in textual information? If innovation leads to alpha, it might be a good idea to follow innovation. And where is there more innovation than on the Internet? The basic components have been in place for some time. The ARPANET, which became the Internet, was first operational two days before Halloween in 1969. The first web site did not appear until 1991 at the CERN nuclear research center. This technology could not be tapped by investors until the availability of Web browsers for the PC.

The first Web browser, Mosaic, was released by the University of Illinois in 1993. Then it was quickly commercialized as Netscape Navigator in 1994, Microsoft Internet Explorer, and other browsers. In the space of a year, the relationship between markets and information was transformed. Figures 4.5 and 4.6 illustrate the effect dramatically.

An earnings surprise is a very pure form of market-moving information event. You know exactly when it happens—when the company announces its earnings—and ...

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