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FRM Part II · FRM Exam Part II · Advances in Artificial Intelligence: Implications for Capital Markets Activities

A firm uses natural language processing on news and social media to generate short-term trading signals. Which risk is MOST specific to this data source?

The most specific risk is manipulation. False or coordinated news and social media content can distort sentiment signals, leading the model to trade on misinformation and potentially contributing to abrupt price moves and losses.

  1. ASignals can be manipulated by false or coordinated content, causing erroneous tradesCorrect
  2. BUnstructured text eliminates the possibility of data bias
  3. CNews data has no timestamp issues
  4. DText signals cannot be combined with price data

Explanation

Alternative text data can be spammed, spoofed or coordinated to move sentiment signals, so models may trade on misinformation. Text data does carry bias and timing issues, and can be combined with price data, so the other statements are wrong.

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