A pair trade is the taking of a long position in one security together with an equal short position in another that is strongly correlated with it. It is sometimes used to refer to multiple long and short positions that are similarly matched.

The effect of a pair trade is to hedge (though not perfectly) against the effect of market and sector movements, so that the return depends on the difference in the performance of the two securities (usually shares).

A scenario for the use of a pair trade is when two shares that have moved together in the past diverge. Such a divergence is often an anomaly and a pair trade provides a simple, market neutral, way of exploiting the anomaly and profiting if the divergence reverses. This is statistical arbitrage.

The obvious objection to a pair trade is that there may be a fundamental reason for the divergence: for example the shares that have gone up may be those of a company that has taken market share from the one whose shares have gone down.

Because of the hedging effect of pairs trades, using derivatives (such as contracts for difference), rather than buying and shorting directly, is not usually particularly risky.

Though the expanding array of news on non-traditional media like blogs and chat pages is a challenge for the robot readers, the speed and efficiency offered by news-mining algorithms are helping hedge funds with just a handful of staff generate as many trades as a giant investment bank and becoming a potential boon to the media industry.

"This is a new class of information technology," said John Partridge, vice president of industry solutions with StreamBase Systems, a technology provider that specializes in processing and analyzing real-time streaming data.

High-frequency investors such as hedge funds are using news-mining platforms like those offered by StreamBase to troll through thousands of electronic feeds of streaming text to identify key phrases on which to trade.Popular phrases include "lowers its outlook" or "raises guidance" or even buzzwords like "stellar performance" that could potentially push a stock lower or higher.

Hedge funds, with their rapid-fire trading style, often allow the news-mining platforms to make trades on their own, capitalizing on the technology's speed

News mining is not just for stock trading, either. For example, French investment bank BNP Paribas' "weakness indicator" counts the number of times the words weak, weakness or weakening are used in the Federal Reserve's beige book report on regional U.S. economies.

More than 50 references in a report typically signals the economy is on the brink of a recession.

Hedge fund investors familiar with news-mining technology said an algorithm based on the "weakness indicator" could easily be created to sell dollars and U.S. stocks and buy bonds if more than 50 references were found.

The growing amount of text and information available on blogs, chat rooms and online forums also pose challenges to robot readers.

Divergence Pairtrade is another market-neutral trading strategy often used by professional traders. The idea is to find two diverging stocks, one a relatively strong performer and the other a weak performer. Then one goes long on the strong stock and short on the weak stock, so that one realizes a profit as the two stocks continue to diverge while the long/short structure keeps the overall trading position hedged against uncertain market movements. In order to find such pairs of stronger/weaker stocks, Tradetrek's next-generation search engines study all possible combinations of stocks for those showing a smooth and steady trend over a reasonably long period of time. A pair is considered an attractive candidate if it shows a stable and strong diverging trend.