A U.K. startup says it can warn you before the market undergoes a nasty selloff.

The company, London-based AlgoDynamix Ltd., has attracted both investors and customers since its founding in 2013 on the strength of its potential and its technology, which seeks “clusters” of telling market activity and alerts clients when it’s found them.

The claim is dramatic — what investor wouldn’t want to get alerted ahead of the worst downward moves? It’s also one other companies have struggled to back up, with many market experts saying reliably anticipating big market movements is difficult if not impossible.

But the company touts recent successes, including alerts in December and January that preceded slumps.

Its CEO and co-founder likens his company’s technology to an ultraviolet light: “It allows you to see things that you can’t otherwise,” Jeremy Sosabowski told MarketWatch in a recent interview.

Tracking a ‘unique fingerprint’ in search of clues

AlgoDynamix uses real-time data from exchanges as indicators, searching for clusters of traders who are bailing out of an investment and aiming to alert clients when sellers are gaining strength before a broad slide has begun.

“People are already getting nervous. They’re getting edgy,” Sosabowski said. “You just can’t see it, because you don’t have the right tools. So with our tools, we give you those insights.”

Sosabowski, great-grandson of Polish general Stanislaw Sosabowski — who was portrayed by Gene Hackman in the 1977 World War II movie “A Bridge Too Far” — runs a seven-employee company that is one of a clutch of startups to grow up around Cambridge, a historic town about 50 miles northeast of London.

Jeremy Sosabowski, AlgoDynamix’s co-founder and CEO AlgoDynamix

The area — known as “Silicon Fen” — is home to several high-tech businesses, many with links to the University of Cambridge, and AlgoDynamix’s product is based on research conducted at that institution.

“The technology is called ‘entropy feature clustering,’ which is a very nice way of saying we look at the order book, we look at the order depth, we look at the order activities and we look for trades that have the same unique signature,” Sosabowski said.

An order book is an exchange’s real-time list of shares offered for purchase or sale at each price point; order depth measures the number of open orders for an asset at different prices, with a deeper market indicated if there are more orders at each price.

“As people trade, as they go throughout the day, there is some information that they leave behind,” Sosabowski said. “We’re tracking that unique fingerprint, and that allows us to put the trade in a cluster.”

The data AlgoDynamix gets from exchanges doesn’t reveal who is behind each trade, but it includes enough information to create clusters that might, for example, include a bank selling an asset and another investor indicating its knowledge of the bank’s action by selling at the same time. (Algodynamix has focused on tracking index futures so far, but it plans to cover individual stocks at some point, Sosabowski said.)

When the company suspects a selloff, it alerts clients either via email or through an online interface.

On Jan. 13, the company notified clients around noon London time, or 7 a.m. Eastern Time, that S&P 500 futures and Nasdaq-100 futures would tumble. That day ended up punishing investors, with the S&P 500 SPX, -1.11% closing down 2.5%, its biggest daily drop in more than three months.

AlgoDynamix also sent an alert on Dec. 7 that preceded a multiday slump. On the chart below, the “A8” marker indicates when clients received the notification that a selloff was imminent.

AlgoDynamix

Sosabowski acknowledges that not all of AlgoDynamix’s alerts are followed by a huge slide. He estimates that major markets suffer 20 to 25 big selloffs each year, and those are the dives that he hopes to flag 24 to 48 hours before they happen. He said the company has been sending alerts for roughly a year and a half, though he declined to say how many it has sent in that time.

“Not every anomaly is going to pan out,” he said. “People start panicking, and the panic subdues.”

Sosabowski also declined to say how many false positives AlgoDynamix has flagged, or how many major market moves its technology might have missed, in the last year and a half. He defends the system’s value, saying a few false positives are worth a warning about big moves that do happen.

“It’s a bit like an insurance policy,” Sosabowski said. “You pay a bit, but then you are protected when things go bad.”

Touting a tool for asset managers, regulators and banks

AlgoDynamix’s target market includes asset managers, investment banks and regulators, according to Sosabowski . (Regulators and bank compliance teams, he says, can use it to spot clusters of trades that might suggest that investors knew of “something that ought not to have been known by the market” — such as a coming merger — ahead of time.)

Customers have used the system under “proof of concept” arrangements, according to Sosabowski. He said the company has three paying clients and a sales pipeline that’s “looking very, very good.”

Competitors include analytics firms that study sentiment data, news feeds and even Twitter activity. Sosabowski said his company tries not to “look at the future based on past data — which is where a lot of the existing models go wrong.”

“We’re the only ones doing deep data — what [people are] actually doing on the exchanges,” said Sosabowski. “What people say they’re doing, and what they’re actually doing, can be somewhat different.”

Ronjon Nag, an early user of the system who is also a backer, gets AlgoDynamix’s alerts via email, using them in connection with other data to attempt to predict market movements, asking himself, “Are these signals together telling me something to be cautious about?”

Nag, an active trader of U.S. stocks and index-tracking funds and a tech entrepreneur, sees the alerts not as a tool for market timing but “information capturing, in a better, quicker method that traders can actually interpret.”

Susanne Chishti said she invested in the company after being impressed with the product — though she initially worried it was too good to be true. Chishti, founder and CEO of London-based angel investor group Fintech Circle, invested with other group members alongside Amadeus Capital Partners, a London-based venture-capital firm.

AlgoDynamix’s backers looked around for similar offerings from other firms, but didn’t find any, according to Sosabowski, who says he welcomes competition.

“Even if somebody else was doing very similar stuff, it would be good, because you’d have ‘Solution A, Solution B.’ It would help with the pricing, and it would help to explain it,” he said. “By all means, please join in.”

This story was first published on March 7, 2016.

The video below shows Sosabowski explaining AlgoDynamix at an “open mic” for startups.