John Dodge

A positive earnings story breaks about Apple, prompting traders to bid up its share price. Positive, negative or flat, it's a scenario that plays out thousands of times amid crowds of traders every quarter.

But Apple's good fortune is also important to its many suppliers and partners, which might represent more profitable trading opportunities.

Just go to the data. Dow Jones & Company and Revere Data LLC struck a deal in February that promises to help traders capitalize on those secondary and tertiary opportunities the moment news breaks. Here's how.

News from Dow Jones, publishers of The Wall Street Journal, is integrated with a Revere database that tracks relationships between the 5,000 publicly traded companies in the United States and all their material constituents: suppliers, customers and partners. Rivals, too.

What's more, the Revere value chains are created by product line, not just by company. To give an idea of the scale of relationships, Revere has found about 2,000 business-to-business relationships among a sample of 20 principal companies.

"We felt you could get a 360-degree view of the potential of [a company's] products and services. We can [identify] competitors by product ... to literally say who Intel competes with in 32-bit microprocessors ... wireless and embedded, not just at the corporate level," explains Kevin O'Brien, Revere CEO and president (see chart).

So where do the 15,000 Dow Jones daily newswire stories enter the picture?

"The value chain in a sense is like all electrons of an atomic bomb. You need that one stray electron to cause a chain reaction. News is that stray electron and catalyst," Rob Passarella, vice president, Dow Jones Financial Markets, says. "If you've got the chain [already] laid out, you can look at those relationships and back test them every time earnings news comes out."

To get a running start, Dow Jones a year ago hired "resident quant" Nat Subsin, previously an equities researcher at Morgan Stanley and Deutsche Bank.

Subsin looked at 20,000 earnings stories during calendar 2009 and concluded that about 5 percent were "significant" based on "Standardized Unexpected Earnings" (SUE) factors. A SUE factor, for example, is the deviation between the analyst consensus for earnings per share (EPS) and the reported EPS.

From those stories and the Revere Relationships database, Subsin says he was able to generate 6,000 trading ideas. He has also examined M&A stories, of which there were about 2,000 in 2009, an off year for such activity. In a typical year, there are about 3,000-4,000 M&A stories a year.

"I [also] compiled a comprehensive historical [view] of all the equities in the U.S. for the past three years looking at actual earnings and compared with expected earnings [and EPS]. I was simulating what a client would have done," explains Subsin.

According to Revere'sO'Brien, one trader using the combined platforms was able to make $1 million profit in just under an hour. The chain reaction started with a news story that said the FDA had approved the principal company's drug-eluting stent.

"An alert popped up. The stock started moving quickly. With minutes, this [trader] knew who its suppliers and competitors were. He went long on the company and its suppliers and shorted its competitors. By the time the rest of the market knew what was happening 56minutes later, he got out and cleared more than $1 million in trading profit,'' O'Brien said.

O'Brien would not identify the trader or the stent company so the story could not be verified. Medtronic, however, said it won approval for a bile duct stent on April 21. Boston Scientific last June got FDA approval for a drug-eluting stent.

With Revere's Relationships database, multiple opportunities involve suppliers, Subsin says. But those suppliers have to generate 10 percent or more of its revenues from the principal company. Companies average about six significant suppliers.

For now, the two companies are focusing on quants using trading models and high-frequency algorithms, but also plan to market the products to asset managers. The Revere database is hosted in an Oracle 10g database. Daily FTP downloads are sent to customers every day in a .csv (comma-separated values) format whose tables lend themselves to inclusion in trading models.