I remember seeing stories about programmers with access to credit card databases getting indicted for trading on the information. This is a legal version of the same thing, and also probably any attempt to make it illegal would be unenforceable.
Precisely. It's unfair for the little guys, but lot's of stuff is unfair... such as most of high speed trading, and the people who use arbitrage to skim from the index funds that use predictable purchasing.
One distinction is whether or not there's a duty of confidentiality owed by the possessor of the information with respect to the source of the information (the "non-public" element of "material non-public information"). It doesn't seem here there would be any duty of confidentiality. Presumably the programmers in your example owed a duty of confidentiality to their employer or contract counterparty.
I mean, you don't necessarily have to make it illegal.
1. It's from hedge funds, and you can invest in a hedge fund today and reap the benefits of their strategies yourself
2. There exists a gap right now, where a startup or data analysis firm could provide this kind of information to smaller investors through some kind of subscription model.
3. Ultimately the government itself could "level the playing field" by either gathering this information through other channels and releasing it (BLS or SEC style) or by replicating the strategies and releasing it.
I think #3 could be viable. We already require businesses to share very important and actionable info with the government, and since everyone does it, the risks of one firm having data leaked and another not are mitigated. (SEC requires public reports, BLS takes private data and aggregates it for higher level views) If the government required businesses to report data to them on a weekly or monthly basis regarding things that are being satellite tracked, they could release this information on a set schedule to basically demolish the ability of institutional investors to gain secret information to bet against the public positions
Unlike the credit card case, these hedge funds are not affiliated with the companies whose stocks they are trading. In addition, the number of cars in a parking lot is not expected to be confidential. They are simply using available tools to make an observation, and using that observation to influence a trading decision.
I see it as just a quantified and scaled up version of, say, noticing more Tesla cars on the street, and choosing to invest. I think making something like that illegal would only be harmful to the stock market and investors.
If it's "public" it's fair game for the stock market. My favorite example was the company Quandl[1] which was monitoring charted flight patterns of companies to determine if a company in the area was going to be purchased.
I went to a recruiting talk by Two Sigma a while back where they discussed the same thing as an example of "look at this cool stuff we get to work on". They had slides with satellite images of some parking lot and showed how they could segment cars, deal with car-like things on roofs, map regions of parking lots to the right stores, handle different conditions like snow, etc.
From a technical perspective it's actually an interesting problem because there are so many things to consider. Really makes you notice how disadvantaged retail traders are, though. I think traditionally a lot of hedge fund strategies are kept pretty secret, but this one is so out of reach and technically difficult for most people that they don't really care if it gets out.
You wouldn’t. But just because a prediction can’t be 100% accurate because of missing data doesn’t mean that the prediction isn’t useful.
Really, what they are likely comparing is the relative changes in parking lot occupancy over time. So it’s not necessary to have complete coverage of all parking lots. You just need enough coverage to make the prediction with a certain level of confidence.
They don't need to. People who park underground, walk or use public transit are close enough to people who park above ground that they get enough data without that. In most cases just one WalMart is enough to infer everything you need to know about them all - if you select the right one for your question. (you wouldn't select just one because then you need to ask if there is something specific about that one, but a statistical sample is enough).
Unless your thesis is people who park underground shop differently. That is a valid idea and you cannot answer it via this study. However you can study it by other means if you believe this is important.
They don't, just as they don't get a sense of the average purchase amount per trip. If above-ground parking lots get 20% more traffic, you can expect roughly 20% higher retail sales with some error bars based on the historical correlation.
The game here is essentially to get noisy signals about companies earlier than the official ones provided by the company. Take satellite pictures of parking lots, do phone surveys of consumers, count trucks leaving supplier companies, whatever. If it's a good predictor, you know upcoming price moves early, and can likely make significant profits off of it.
That site is hosted off-campus, coordinating obtaining the cert from the campus CA and then getting it into their off-campus host is probably just a low-priority. They should still do it, though, being off HTTPS is going to hurt their SEO soon enough.
This article is very wrong to confuse "material non-public information" with hard to acquire information like counting cars in satellite photos.
Remember the Matt Levine test: insider trading is about theft, not fairness.
When a company insider uses private company information to trade (or colludes with an outside party to do so) they are stealing material non-public information from the company for their own benefit. Nothing of the kind is happening when a hedge fund (or anyone else) acquires and analyzes satellite photos.
There is no expectation of fairness in the stock market. All sorts of people work very hard and spend a lot of money to develop proprietary information in the pursuit of stronger returns. There is nothing at all wrong wit this, especially because it means that in the end we all get more accurately priced securities.
This is exactly right. If you're upset about this then you should be upset that hedge funds can afford to hire smarter analysts than you, which is just silly.
That's the why this isn't a perfect quote. Some proponents of insider trading laws pose that exact question and pursue insider trading violations in the interest of protecting the "fairness" of the markets.
That's what I've done, but I still idly (this is not really in the top 100 things I'm concerned about right now) wonder where this ends up if things sort themselves out so much.
If this discussion is still narrowly tailored to the securities market, since this discussion was also about "insider trading", which is a unique prohibition to the securities market and not any other capital market then:
Retail has no business in the securities market. thats where it ends up. stop playing. retail investors flocking to the stock market is a 40 year old meme that is built upon non-objective thought and gullibility. It is built on laziness. Retail doesn't meme commodities because there is almost no lazy investing approach to it. But the reality is that there are other capital markets. Retail isn't helping the stock market, they aren't helping the companies they like by buying stocks they "recognize", they are MAYBE lowering borrowing costs for the company, its executives and employees, but retail's trading has nothing to do with anything.
There were some solid ways to develop retirement strategies with lifelong careers, pensions, and other older retirement vehicles. However, pensions are largely irrelevant outside the public sector now, the older retirement vehicles have stagnated/become poor investments (like annuities, which have become a landmine for terrible fees), and what was left was 401ks and individual retail stocks.
Mutual funds are a similar landmine, where transparency is lost and they're often built for the tax particularities of retirement accounts.
That leaves retail and... ETFs, which we can only wait for someone to find an angle to extract more value at the expense of small investors' returns.
Yes, 401ks were hoisted on the public and threw the most responsible one's money into the stock market. Creating reliable liquidity for other institutional firms.
It is pretty amazing and ingenious.
No, it doesn't undermine the observation that retail shouldn't be playing.
In this case there still is the discussion of which Vanguard fund to pick. Putting your money into the SP500 is not the “market portfolio” so to speak. In that case you are overweight large-cap and overweight US. In short, picking an index fund is different (and in many cases leas complex) than picking individual stocks, but it’s still not a trivial exercise.
If you want trivial just use a target date fund. Otherwise you are basically just going with a blend of 4-5 index funds and updating the allocation once a year. You can even copy the allocation used by their target date funds. It's not that complicated.
There are still good reasons to buy-and-hold on single stocks as an individual investor, though doing so increases risk significantly over index and Vanguard-style funds.
They absolutely shouldn't play unless they like losing money. It is extremely hard for professional investors to beat the market who spend all day every day working on it. It is basically impossible for a collection of retail investors to beat the market. At best, retail investors are simply gambling.
> "At best, retail investors are simply gambling."
that's just not true and is a gross over simplification. for one, not beating the market is NOOOOOT the same as losing money. For another, even if they do not beat the market, there are a lot of other benefits.
People gain an understanding of how things like bonds and equities work. I cant tell you how many people (masters degree included) think you can loose more money than you invest by buying a stock. I seen someone literally not participate in 401k matching because of that thought.
there is something to be said about having greater control over one's money. When someone says lets eat out at this expensive 150$ plate restaurant, I think gee I can buy X shares of Y stock instead.
I personally have already maxed out my 401k, and if I want to retire I need to contribute more. currently I am beating the market, and I have little care if 'the average investor' isn't. it gives me something to do, empowers me, and is not 'at best' gambling.
If you can beat the market over a 10-15 year period, you are in a very small group of extremely fortunate individuals (some of which are simply lucky). If you have beaten the market over the last 1-5 years, you likely invested in particular factors without really knowing it. Once those factors lose favor, you will significantly under perform the market.
I personally invest primarily in well diversified, extremely low cost ETFs and I buy 1 - 2 positions a year outside of that portfolio (right now the main one is bitcoin for me). But, I'm always looking around for something that I think can be a 10X return.
But... I rely on my primary diversified portfolio for my retirement and the single 1 or 2 investments I make outside of that are for fun, knowledge and I fully acknowledge gambling.
Enjoying things is fine, but as someone without "fuck you money", 90% of the time I'd get more enjoyment out of a $20 plate and the ability to retire a day earlier.
I can't think of any reason we'd want to encourage retail investors to buy single name stocks. In days of yore you could argue that it was a good way for them to share in the bounties of economic growth, but with the rise of low-cost passive index funds that's obviously no longer true.
If you do your own legwork you can find companies that are not going to go up long term. There is as much of this as there was in the past, but there is still a lot of better than market investments for someone who a little money.
Personally I find the above work boring - it ends up being a full time job, so once I subtract my salary I'm not really better off financially than an index fund and I'd hate my job.
As for why don't the big guys do this: it isn't worth their time to chase a small gain (say $20,000) so there are many things the small guy can do that are more than wroth it that is beneath the notice of the big guy. They know about these things, they need to make more money to pay for their overhead.
They should not. All that's left to retail investors are mutual funds and index funds, which can be a decent deal but which also tie the interests of retirees to the interests of shareholders, which is kind of dumb and fucked up.
Gee, I dunno, maybe think about it for a second. What does a 65 year-old lower middle-class retiree with some money stashed in a 401(k) have in common with an ExxonMobil shareholder aside from the need to generate as much profit as possible? Do you really think this makes sense from a public policy perspective, to pit the retirement needs of the old against, e.g., the environmental health of the young? Please spare me the purely symbolic and utterly meaningless "but they are shareholders, too" argument. Sure. Me and Warren Buffet, we're just the same!
It is quite literally dumb and fucked up to tie comfortable retirement to things like releasing carbon into the atmosphere, or defense industry profits, or Wal-Mart's quarterly profits, or to the stability of Jeff Bezos' marriage.
> Do you really think this makes sense from a public policy perspective, to pit the retirement needs of the old against, e.g., the environmental health of the young?
But couldn’t you argue in exactly the same way for disenfranchisement? Do you think retired people should be allowed to vote?
I think that argument actually supports their point.
I believe that everyone has a human right to vote. However, retired people have generally already established themselves; therefore, the changes that government makes, particularly on social issues, has minimal effect on them. Therefore, I think its unfair for the generation who is still establishing themselves not to be held hostage to the previous generation's vision of society.
> Therefore, I think [it's] unfair for the generation who is still establishing themselves not to be held hostage to the previous generation's vision of society.
I think you have one more negation than you intended in that sentence.
Retirement funds are the largest shareholder of all. The 65 year old alone isn't much, but all of them combined together are more than any other category of shareholder. Middle class retirement accounts own more stock than the rich.
The smart hedge funds' edge is pervasive but small. And there are a lot of dumb hedge funds! (Also a lot of scheming hedge funds that are fee maximizers, not investment-return maximizers.)
The upshot is that for a year in which market indexes are up 9.1% and the smartest investors do much better, Pat Q. Public can still earn maybe 8% as a retail investor in single stocks if she/he doesn't churn it all away in overly rapid trading. That's not a bad outcome.
Stragglers will stay in the game for a long time in such a scenario.
Though I have a great amount of respect for them, I'll point out that Jim Simons may have multiple motivations to downplay the size of any edge that RenTech has over the averages.
You can have a total return of 20%, a risk free rate of 3%, a Beta of 2, and a market return of 13% and you've actually underperformed the market on a risk-adjusted basis. Your alpha would be 20% - 3% - 2 * (13% - 3%) = -3%
Such behaviour only improves stock pricing. After all if a hedge fund opens a large position based on such data it prices in additional information (satellite imagery).
The point of the stock market is not to let small or large investors become rich. It's to provide funding to companies.
Retail investors usually do not day trade, do not do HFT, and do not rely on exotic instruments. Hedge funds do have an edge in some specific fields, but everybody still can do medium-to-long term investing.
Lose is relative. If a retail investor picks a stock that ends up outperforming the market then they’ve still done well, even if the hedge fund bought and sold at better time than the retail investor.
Presumably, there are multiple sophisticated investors competing with each other, and all of their bets affect the market price. There shouldn't be a replicable strategy for beating everyone else if the market is large enough.
If there is a distribution of skill in investors, using mutual funds might prevent you from being in the lower percentiles of under-performing investors. However if you really have a strategy that involves taking the market price that manages to consistently under-perform, then you could make money off of that strategy too.
I mean they're not almost certain to lose if they are the smarter analyst.
If they're not the smarter analyst then yeah they're going to lose i.e. not outperform the market. Of course that doesn't mean that they'll lose money.
> When a company insider uses private company information to trade (or colludes with an outside party to do so) they are stealing material non-public information from the company for their own benefit.
I must be dumb, but I don't understand this statement... How is that a "theft"? You knowing that I eat 2 eggs in the morning when I don't want people to know is not you "stealing" information from me.
You're stealing value by profiting on information which you had some duty to protect. For example, a company executive who knows that one of the company's products is about to be recalled generally owes a duty of loyalty to the company not to profit off of that knowledge to the disadvantage of the company.
From whom is it stealing value from? Random other potential investors on the stock market? Since the parent comment is specifically mentioning semantics, this is the distinction "theft" vs "fairness" that I don't really understand.
From an outsider perspective like me (I don't own stocks except through my 401k), Wall Street seems like a game of information asymmetry anyway where the only winners have an information edge at some moment in time. Now the question is about how "fairly" was the information obtained which seems pretty blurry to define to me.
When a company gives you access to private information (like sales figures for the next quarter), you have an obligation not to trade securities on that information, as you are essentially taking (or reducing) the opportunity of the company to trade on that information itself. However most of my information is from reading Money Stuff, so don't take me at my word.
Suppose you are giving a prize for someone who guesses how many eggs you eat in the morning. If I watch you checkout at the grocery store and based on the number of eggs you buy, guess that you eat 2 eggs a day, and win the prize, that is not theft.
If however your chef who prepares you breakfast every morning “guesses” you eat 2 eggs, then that would be problematic.
According to OP, insider trading is about theft, not fairness. Given that, how is it problematic for the chef in your analogy to guess? They're not stealing, they're just acting in ways most people would consider unfair.
If a chef is fully employed by you, then all that information gained/used in the course of that employment also belongs to you.
If the chef working in your restaurant sells a cake he made there and puts the money in his pocket instead of yours, that's theft. It's legal to sell cakes the chef made, it's just the the resulting value belongs to the employer and not to the chef personally.
If the chef working in your restaurant sells some of the cooking ingredients and puts the money in his pocket instead of yours, that's theft. It's legal to sell spare cooking ingredients from a kitchen, it's just that the resulting value belongs to the employer.
And in the exact same manner, if the chef working in your restaurant sells the customer order statistics (e.g. how many eggs were eaten) and puts the money in his pocket instead of yours, that's theft. It's legal to sell customer order stats, it's just that as far as those stats have value, that value belongs to the employer and not to the chef personally.
Some information has material amounts of actual dollar value. Whoever knows that your employer has an acquisition in the works that will be announced tomorrow has an extraordinarily easy way to monetize that. This information rightfully belongs to your employer, who is keeping it under wraps for financially important business reasons. Sharing it or acting on it means enriching yourself at the expense of those business reasons (or more directly, through influencing stock prices).
I know that. I'm asking specifically about the semantics of "theft" vs "fairness" here. I don't think the word "theft" makes much sense in this context.
I think the theft angle here is analogous to the theft angle in piracy of digital content.
When I take information entrusted to me by my company and use that information to profit in the market, I have taken information, used it in a manner not authorized, and profited.
That's different from someone else unaffiliated with the company independently deriving the information, using it in the market, and profiting.
As an example, the researchers who discovered VW's cheating on diesel emissions tests (assuming they were independent) would be perfectly within their rights to short or buy puts on Volkswagen. VW executives who were responding to the EPA inquiry or otherwise discovered the cheating would not be within their rights. In both cases, there was a moment where that information was material to the valuation of VW and not public, yet one group could legally trade on it and another could not.
> You knowing that I eat 2 eggs in the morning when I don't want people to know is not you "stealing" information from me.
Correct, you don't necessarily have to "steal" that information to find it out.
If you hire me to cook to you breakfast with the understanding that your breakfast habits are confidential and I give that information away, then that is "stealing" information because I have a duty to keep that information private.
If I spy on you while you are eating and figure it out and give the information away, then I did not "steal" the information because I don't have a duty to keep that information secret.
> Remember the Matt Levine test: insider trading is about theft, not fairness.
While appreciating the usefulness of this quote, one should also understand that usefulness is limited by the actual enforcement of insider trading laws and insider trading doctrine generally, which does not square with the analogy. There is certainly an element of "fairness" that is being protected implicitly and/or explicitly in enforcement actions, with the purported interest of keeping the markets attractive to retail investors. On the other hand, "fairness" is undermined in cases like Enron where prohibitions on insider trading likely artificially reduced downward pressure on the price of the stock (costing investors who bought later larger losses) by disallowing folks who understood what was going on from selling the stock.
> There is nothing at all wrong wit this, especially because it means that in the end we all get more accurately priced securities.
I believe the counter argument is only people with enough wealth to afford an account at one of these hedge funds gains an immediate advantage here. So it's yet another way "the rich get richer."
Doesn't bother me, but I can see why other people would have a problem with it. And I severely doubt more than 5% of the planet cares about whether "in the end we all get more accurately priced securities."
> And I severely doubt more than 5% of the planet cares about whether "in the end we all get more accurately priced securities."
Accurately priced securities are like a responsive public health system or redundancy in the electricity grid. Almost nobody cares about these things directly.
Yet virtually everybody enjoys the enormous gains in material living standards that are facilitated by having these things in place.
I agree, I just know they don't care and that this sort of statement is unconvincing to people who don't already believe in markets. If you haven't noticed, there are many.
I'm more than a little surprised that Haas would publish an article that seems to indicate a complete lack of understanding of the purpose of the markets.
Better data yields more efficient markets which is what we actually want.
“Technology was supposed to level the playing field, but what I see is the fence separating sophisticated and unsophisticated investors growing higher,” says Patatoukas
As if that's a bad thing or a surprise to anyone...
Indeed. The stock market isn't a game where one person's win is another's loss. The price is an information conduit which signals where the economy should allocate capital.
Both of these things can be true. Every transaction certainly provides us with information, but also, if two people trade based on competing beliefs about the price, one of them is wrong. As for it being a game, well, when dollars are used to purchase stocks, they almost never go into the coffers of the company whose stock it is. They go into the pockets of someone else who is also trading stocks. As you said, it's a signal about where the economy should allocate capital, but to me it seems to be far closer to a game than to an actual useful allocation of that capital.
The stock market is the frontend of the whole system. Companies can issue stock to raise money to fund operations, compensate employees, etc. Companies can also use their stock as collateral to borrow money. The higher the stock price the lower the effective cost raising money.
By being correct about a stock in a trade you end up being rewarded for decreasing the cost of capital of companies that do the most with it.
I understand how all that works, but the reality is that the number of transactions that actually involve a company giving someone shares in exchange for cash is vanishingly small compared to the total number of stock trades that happen. Some quick Googling indicates that in the first quarter of 2019, startups raised about $30b. Also according to some quick Googling, in 2013, the NYSE did about $170b per DAY of trading. Obviously that $30b number isn't close to all the capital raised by companies in that time period, but neither is the NYSE the only place where stocks are trading hands. The vast, vast majority of transactions do not involve a company raising money.
And just a minor quibble, a more accurate stock price doesn't always lower the cost to a particular company of raising money. It makes the market more efficient over all, for sure, but often companies would prefer a less accurate (ie, higher) stock price for the purposes of raising money.
Needless to say, I'm not convinced that this kind of volume is necessary to get most of the benefit of the stock market as a price discovery mechanism. I'm not saying anything needs to change, I'm just not sure it's such a huge public good.
I think the author's dilemma is the data is proprietary and won't be open or released unless it benefits the funds position. Fund managers will act on their information to profit before the market reacts or release the data after shoring their position and portfolio. If the data was open, analysis checked, and the information confirmed accurate then it probably would lead to a more efficient or at least accurate market valuation. But if it sits in a safe until no longer useful or released by someone else then we won't know.
I wonder if the author is thinking of groups that suspected the 2008 crash but either didn't raise the alarm and made bets on the outcome or weren't heard in the commotion. Any proprietary information they might have had could have alerted the public or something but there's always noise or incorrect predictions about the market and hindsight is 20/20. If their worldview is that private groups controlling information for private gain is bad, well that's already going on so this is just an extension of that.
I'm sure most funds have groups looking into data collection on top of modeling market results based on various inputs the data suggests. I'm sure most funds have some amount of proprietary data or algorithms to run against it, even if the info overlaps or they sourced from the same information like publicly available government released satellite photos. I'm sure that the market (mostly computer programatically trading) reacts fairly quickly to big players making less than subtle moves. There may be some method to deciding how far to go with certain information to not tip your hand or reveal information by inference. It's how the whole thing works already, and dropping into a mutual fund seems the best way to take advantage with minimal risk.
If the information gathered is required to be made public, they won't go gather it. It's simple incentives.
There is no market regulatory philosophy that says "thou shalt not profit from working harder or smarter." Rather, working harder/smarter is encouraged, because when information is discovered, the new owner of that information acts on it in such a way that it creates price pressure in the market to push that security to be more accurately priced.
This is an unalloyed good. Yes, the people who get the information may profit from it, in a similar way any capitalist profits by reacting to price signals. There is no guarantee that all information should be available to everyone. If your information gathering is better and more determined, and your analysis superior, you may profit more than those who do not put in the effort.
Technology does level the playing field. As a software engineer, I can get access to realtime institutional-grade data and write strategies that were impossible even a few years before. Not even speaking about crypto exchanges, where all data is public.
It's almost always a good thing when somebody uses information available to them in a unique way to inform pricing decisions, since that information will then become a factor in the public value of the asset.
I wonder if stuff like this is ever a form of parallel construction for insider trading. It sounds cool - so maybe it passes the sniff test and avoids further scrutiny?
Someone asked that on HN before. The bottom line is that parallel construction for insider trading isn't a thing. If the SEC can show you had NMPI and traded, you're in trouble, even if it didn't inform your trading. If they can't show it, it doesn't matter if your explanation was that you had a lucky feeling.
Also, there are armies of vendors selling all kinds of data to hedge funds, the satellite data providers are just good at getting splashy articles written.
Parallel construction is only a thing that the government can get away with in prosecuting people, because the government has power and individuals do not.
> wrong to confuse "material non-public information" with hard to acquire information like counting cars in satellite photos.
Err, no he is not wrong to confuse it.
Is satellite imagery public information? Is that something a person in the normal public could acquire even if they wanted to?
If it's not public and the results of the imagery are material... then it's material non-public information and it's illegal to use it for trading purposes.
>All sorts of people work very hard and spend a lot of money to develop proprietary information in the pursuit of stronger
But they should be doing it under the umbrella of PUBLIC information. If not, then yes it is completely "unfair". Your bullshit about there should be "no expectation of fairness in the stock market" is just silly.
There's actually nothing illegal about procuring non-public information in general (see Mosiac Theory). Satellite images are not considered material since they alone don't provide you with enough information to trigger any market action.
i think we read very different articles. the one i read is pure journalism. news without taking a side. the position of the professors is probably as you describe — feeling butthurt — but it’s not this article’s job to take a position. it isn’t an editorial.
the article is exactly right to present the professors’ opinion as-is.
I think it's incumbent on good journalists to put the views of the people they interview in the proper context. If the subject of an article says something wrong, and the article fails to point that out, it is a lie of omission.
Which part of the article do you think confuses MNPI with alternative data? It seemed that the purpose of the paper is to point out how the line between “public” information and “non-public” information is blurring for those who can afford access.
And given how difficult it is to define insider trading that seems like a pretty accurate assessment to me. Alternative data firms are the new expert network firms in the wake of Rajaratnam.
The line is not blurring. Non-public information is information owned by the company. This is different from information that is hard to acquire and hence, not available to everyone.
You are making the same mistake the article does when you state this line is blurring.
> The line is not blurring. Non-public information is information owned by the company. This is different from information that is hard to acquire and hence, not available to everyone.
I didn’t realize it was so cut and dry. How silly of me! I guess all of the work I’ve done providing legal advice to hedge funds on what is and isn’t insider trading since Preet Bahara first came to town was for nothing. Thanks for clearing that up.
Do you have some qualified experience or situations you can point to? It sounds like you do, or should, given the qualifications you allude to. That would be a useful addition to this discussion.
> And given how difficult it is to define insider trading that seems like a pretty accurate assessment to me. Alternative data firms are the new expert network firms in the wake of Rajaratnam.
I fail to see the parallel with Rajaratnam, since Rajaratnam was accused and convicted of insider trading on the basis of leaking from corporate insider executives(!) That's precisely the distinction that is being drawn in the comments here, between theft of insider information and the acquisition of difficult-to-intuit public information.
To answer your question, these parts:
> But technology is increasingly blurring the boundaries between public and private information, creating data opportunities that are legal, but are expensive and often require special expertise to access. “Technology was supposed to level the playing field, but what I see is the fence separating sophisticated and unsophisticated investors growing higher,” says Patatoukas, who is passionate about teaching his students to analyze public sources of financial information and finds the trend troubling. “That’s the dark side of big data. Our evidence suggests that unequal access to alternative data leaves individual investors outside the information loop.”
> In the aftermath of the financial crisis, there has been increased regulatory interest in the role of informed trading and disclosure requirements to protect the fairness and integrity of capital markets. With this in mind, Patatoukas hopes that the paper will get the attention of the regulators. “In a market setting where the line separating public from material non-public information is getting blurrier, the question that regulators need to answer is: What is their role in terms of leveling the playing field for individual investors?”
There's a whole marketplace where companies with so-called "Alternative-data" sell their datasets to quant traders. Satellite imagery of farms, passenger traffic through airports, all sorts of random, seemingly disparate data.
The reason your free weather app asks for your location data isn't for "local weather forecasts". Well, it is, but that's a cost for them. The income comes from keeping that location tracking on all the time and selling which stores and dentists you go to. Someone can link the NYT story from a few months ago when this came to mainstream attention.
Hedge funds also fly cesnas over refinery fields to look at the levels of those big tanks you see off the highway... most of them have roofs that move up or down with capacity, and those that don't you look at with an infrared camera to look at relative temperature differences.
If anyone is profiting off my location I better get a cut of it haha. It's amazing what they can do and I enjoy data-centric trading strategies but we don't have to violate individual privacy.
Some employees of a credit card company got in trouble for this sort of thing a while ago. They were running queries against customer transactions to figure out sales ahead of earnings calls. For example, they figured out that Chipotle was going to beat expectations and bought a ton of stock just before the earnings call. (This very predictably got the attention of the SEC)
Alternative data and analytics providers tend to fall into two categories:
1. They are just trying to ride the ML hype train and they sell effectively polished turds to board member buddies. This is the vast majority of the alt data and analytics firms. They have flashy dashboards and allow you to drag&drop together models and data. The whole thing looks very fancy during the sales pitch. It's all animated and shows charts that impress CEOs. Then when your quants get hold of the data they discover that it's real world predictive power is zero.
2. They actually discover valuable data or build models that genuinely produce an edge on the market. These either turn into hedge funds or are bought by an existing hedge fund to run the model in house. You rarely hear of these because their offering is public only briefly or not at all.
I find it somewhat interesting to what lengths traders go for profits. Cue people who explain how this makes the markets more efficient.
Something I'm wondering about though: The article makes it sound like this is some new unfair advantage of the big traders. But isn't this an old game? If you can afford to acquire and process the data you're likely going to beat the other participants. That was always true. I don't see what's qualitatively different here. Is there?
It increases the information that makes its way into the markets and makes it more likely that the price reflects the what's happening in the real world.
A world in which nobody bothered to check whether a company was actually producing anything would turn the stock market into a collective guessing game.
>A world in which nobody bothered to check whether a company was actually producing anything would turn the stock market into a collective guessing game.
The stock market is a collective guessing game. These stories suffer from survivorship bias. For every investor A you hear about who did X and was successful, there are investors B, C, and D who also did X and were not successful, and don’t get articles written about them. There are also investors E, F, and G who don’t do X and may be successful or unsuccessful.
Finding someone successful at stock picking and asking him what he did to be successful is like finding that 1 out of 1024 person who flipped a coin heads 10 times in a row and asking him what makes him such a great coin flipper.
By that argument, there'd be no successful insider traders, but clearly you can beat make money if you're an insider. You know that the company is (doing well/doing bad) before everyone else does, you trade on that, you make money from the people who are in the dark.
The hard part is not regressing to the mean, and consistently beating the market, which sure, nobody can do. But if I learn today that a stock is going to rise tomorrow, and I buy as much as I can, the stock will rise a bit today. So the market has become a little bit more efficient.
That I happen to then base all my subsequent trades on overconfidence and tossing darts doesn't retroactively invalidate that trade. You can even make a market more efficient on losing trades- you short a stock, it goes down a bit, but you spend more maintaining the short than the stock goes down. Then, the stock crashes after your short expires. Oops! But your prediction was still partly right, and that information was integrated into the price a bit earlier than it would have been without you.
Eamon Javers' book Broker, Trader, Lawyer, Spy covers some cases of this sort of thing. One I can easily remember is a hedge fund flew private planes around taking areal photos near power plants. Coal fire power plants store their fuel out in the open and they buy it by the train-load, so they were able to time the market based upon when power plants were going to make large coal purchases, as they do it when their piles of coal reach a certain size. I don't remember the numbers quoted in the book but they made money doing this, it was a couple percent.
It's only unfair if you think your 401k or personal trading account is/can/will grow anything like what hedge funds do. This coal market manipulating fund, they put money in, flying planes around and taking pictures isn't free, then they did analysis on the pictures which wasn't free, then they put real money in to the market to bet on it moving a certain way... which they are really only allowed to do because there is a counter-party that is willing to take that bet on. If it were really egregious, you could argue that the folks buying energy at incrementally higher rates are getting the shaft and that's not really fair but their energy provider could be smarter about when it orders up fuel. Once it goes public, the players and market tend to react to it
There is a (likely apocryphal) story that when Galileo presented the Doge of Venice with his first telescope, he took him aside privately and they went to the tallest tower in Venice to spy on the incoming trade vessels, then rushed down to the market and proceeded to make a killing on the knowledge of when exactly cargo would be arriving.
And another about how the Rothchilds had a better messaging system (flags? Burning pyres? Pigeons?) after the of the battle of Waterloo and traded British Government bonds on the London exchange after the win (first openly selling to head fake the market which knew of their messaging time advantage and then buying through nominees in the ensuing panic)
It's a good thing for markets to reward information-gathering. Truth is a valuable commodity for the public. For every current investor who will lose money when the truth is revealed, there are many more prospective investors who will be protected from investing in a losing proposition.
The alternative is a Soviet-style disconnection from reality. A market planner in a far-away office planned for a farm to produce some amount of output, so, that's how much the farm officially put out, nevermind that there was a drought and part of the output was diverted to the black market etc. But how is the planner supposed to know? Without feedback, without the truth, it becomes impossible to come up with accurate numbers for anything. Without the truth, the economy is a house of cards.
This article reminds me of tracking corporate jets and seeing if they were doing tarmac M&A talks. There are a lot of interesting opportunities for 'corporate information side-channel' attacks and it would be a great opportunity for a new information based corporation to corral this information and sell it.
Nothing new here other than satellites. Years ago (1990s?) Peter Lynch - at the time manager of the largest mutual fund followed his daughters into a shopping mall for back to school - his daughters didn't go into GAP stores so he went back to the office and sold as his shared of GAP. His fund beat everyone else by a large margin because GAP stocks dropped a month latter when they announced the earnings drop.
This is better of course, but nothing you can't do in some other way with a little work.
His book, One Up On Wall Street, references this idea of using casual observations to find undervalued stocks. You might find that interesting to look through.
Was going to make the same comment. I remember Peter talking about how he used foot traffic at the mall to size up retailers he was looking at back in the early 90's. These were interviews on channels like CNBC, so pretty widely watched by retail investors.
All the satellites do is automate the work and I'm pretty sure hedge funds have been using satellite pics for well over a decade now. (I recall reading about the parking lot use case pre-2010) So really all that's changed is that they're now using ML to automate most of the work that analysts used to do manually.
As an occasional retail trader, it doesn't bother me at all that other market participants are trying to be better informed. In fact, it means that market prices are more likely to be properly-priced.
We should not aspire to drag hedge-fund research down to the Main Street level. If there is a place for government in this context, it is to fund the education necessary to help retail investors learn a) how to take beneficial approaches to investing and risk, b) to appreciate the realities of trading against professional investors, and c) to understand how to conceive, test, and implement their own hypotheses in the real world.
> As an occasional retail trader, it doesn't bother me at all that other market participants are trying to be better informed. In fact, it means that market prices are more likely to be properly-priced.
What about companies that find out about your retail trade before it's even executed, and are able to act on that information to profit from your very intent to trade?
> This is called front running and is super illegal.
Are you sure it's illegal if it's a hedge fund with access to order flow from a third party?
"Front running is one of the easiest ways to make money. It's essentially insider trading, except the inside information isn't about corporate activity; the information is about client order flow. In this case, since the index investors are not their clients, it is legal for hedge funds and any independent traders to front run them. One could argue that the hedge fund managers are doing nothing wrong; it's the investors' fault for acting irresponsibly. The problem with that argument is that many of these investors don't have a clue about what is happening to them." [0]
That article points out that "front running"(which it isn't) by HF may cost .2% a year. Its probably less than that. Bid/ask spreads are often around that percentage. This is just a trading cost. Nothing nefarious is happening here. The spread may go up if a large fund is buying, but this is only natural due to supply and demand. These HFs are just providing liquidity and "charging" a small fee for doing so. If nobody did this, trading costs would probably be even higher. There is extreme amounts of FUD about HFT and market making for some reason.
Now about the Russel indexes - the article has a point there. They are notoriously shitty indexes. Nobody should be putting money into those. But still - nothing illegal(nor should it be). This is yes, clearly a case of "investors' fault for acting irresponsibly". Nobody is forcing them to use these indexes and this information isn't hidden anywhere. Last thing we need is 100 more regulations.
Arguments for or against HFT aside, the optics around HFT are pretty bad. Hedge funds getting rich investing millions in faster ways to trade isn't going to play well.
If you're a market maker or broker, it is illegal for you or any part of your firm that you have informed to front run client orders, plain and simple.
Funnily enough I've been involved in this argument a number of times on this forum. Front Running is not illegal, order flow can be purchased, and even institutional investors are unable to buy portions of millions of stock in one go. You can theoretically front-run part of that order if your algorithms analysing orders think that a big order is following current ones. People will argue front running is illegal because the first few results on google have misconstrued the idea with insider trading but if you dive into some financial books you'll find as a concept it's legal, but there are illegal ways of doing it.
edit: found the article quoted last time I discussed this.
"A few high-frequency traders front-run buy-side traders who are working orders, thereby making the latter’s trades more expensive. Such activities are legal if the high-frequency traders do not improperly obtain information about the orders they front-run."
But you can front-run using public information. Large orders are broken up and with sufficient analysis and prediction you can front-run a portion of them.
Firms don't buy order flow from Robinhood in order to trade in front of those orders, they buy order flow from Robinhood to execute those orders for those customers which is a service that those customers pay for as purchasers of liquidity.
You can't really "front run" a retail order. Front running means you (assuming you are an agency broker) get a big market moving order from a customer, do a trade in your own account first (in the same direction as the customer order), then execute the customer order which moves the market in your favor.
Retail orders are small and generally aren't capable of moving prices. Your order for 100 shares of whatever isn't going to move the price so you can't really make money ahead of it.
Front-running is fine with me. It I place a limit order that says I'll buy a pizza for $10 or less, and someone can buy that pizza for $8 and sell it to me for $10, I'm a happy buyer -- I'll expect to get at least $10 of utility out of that pizza. Without funding the market-makers, there may be no market....
The tone of the article seems like it has an axe to grind. Is it really that much of a surprise that very well capitalised investors have significant advantages of "main street" investors?
That's always been the argument for index funds for regular investors, you're never going to compete with hedge funds, why waste your time?
Honestly, I'm not particularly impressed. There are a lot of other trading edges that could be found for a lot less hassle and money, but I guess that's also the beautiful thing about the market - more ways to skin a cat than anyone can imagine, and it's also not a zero sum game.
Indeed, it's negative. While the big funds steal money from small investors the waste of energy and the pollution caused by launching satellites remains.
The same thing has been done with mobile data for many years, with higher fidelity. Unlike with satellite imagery, the measurement is almost continuous, you can accurately characterize which subpopulations are changing behavior, and you can sometimes characterize the change in behavior e.g. shopping more/less, spending more time at different retailers/competitors, etc.
Remote sensing like satellite is excellent for other similar types financial modeling applications, but I wouldn't use it for modeling retail as it is much too coarse.
I almost worked for a satellite imaging company that does this stuff. It kind of bothered me that rather than providing farmers or the government with this extremely rich agricultural data, they were just contracted out to specific hedge funds that would use the data to give them an edge in trading. I feel like that's not the best use of that kind of data to society
>“What we found is that it’s a gain for large sophisticated investors who can afford the substantial costs of acquiring and processing big alternative data”
This is yet another example of wealth accumulating, of rich actors getting richer faster than poor ones. Without some controls on the behaviours that allow wealth to accumulate, it will further concentrate among the wealthy. I would argue that is a bad outcome.
Any game where you get more of an advantage the more points you accumulate from a fixed pool of points is going to rapidly result in an unequal share of the points going to the first person to acquire the advantage.
Monopoly was created as a game to warn of the pitfalls of capitalism (it's a simplified form of the winner takes if not all a disproportionate share scenario that is life)[1]
Of course that I think this puts me at odds with many people, I like capitalism, I like the social pluses of it but I believe that capitalism should be sub-ordinate to society directly (more what you see in the north of europe) and less the other way around (pretty much most other places and arguably the US).
Nothing unfair at all. Savvy investors have used many tools in the past as well. One analyst at Tiger Fund had got a job at Macy’s in NYC in the cosmetics department before making a decision on whether to have a position on L’Oreal. Unless they have time to do their homework etc.. main street investors should stick to index funds or bonds.
I was listening to a podcast on trading where there was a quant trader as a guest. He mentioned that quant firms have been doing this for years. The guest mentioned that this is no longer an advantage in quant trading as it is common knowledge and can be done by other firms.
Something that is visible from space - the number of cars in a parking lot - seems to be the very antithesis of "non-public" information. I think Berkeley missed the thread on this one.
Yes, but it's not like the cars are ONLY visible from space. You are welcome to organize a large group of people to travel around to parking lots and count cars and then privately share your findings. What the funds are doing is just a more efficient version of that. It's all public information.
What is your definition of "public information"? It's trickier than you may think to define it precisely. For example, is any processed version of "public information" also public information?
Completely agree. My point is only that there's no real argument here that this is "non-public information," which is what insider trading laws are about.
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[ 2.5 ms ] story [ 228 ms ] thread1. It's from hedge funds, and you can invest in a hedge fund today and reap the benefits of their strategies yourself
2. There exists a gap right now, where a startup or data analysis firm could provide this kind of information to smaller investors through some kind of subscription model.
3. Ultimately the government itself could "level the playing field" by either gathering this information through other channels and releasing it (BLS or SEC style) or by replicating the strategies and releasing it.
I think #3 could be viable. We already require businesses to share very important and actionable info with the government, and since everyone does it, the risks of one firm having data leaked and another not are mitigated. (SEC requires public reports, BLS takes private data and aggregates it for higher level views) If the government required businesses to report data to them on a weekly or monthly basis regarding things that are being satellite tracked, they could release this information on a set schedule to basically demolish the ability of institutional investors to gain secret information to bet against the public positions
I see it as just a quantified and scaled up version of, say, noticing more Tesla cars on the street, and choosing to invest. I think making something like that illegal would only be harmful to the stock market and investors.
[0] https://www.bloomberg.com/opinion/articles/2015-01-23/capita...
[1] https://news.ycombinator.com/item?id=8966817
[2] https://www.reuters.com/article/us-sec-capital-one-fin-insid...
https://projectpiglet.com/
If it's "public" it's fair game for the stock market. My favorite example was the company Quandl[1] which was monitoring charted flight patterns of companies to determine if a company in the area was going to be purchased.
[1] https://blog.quandl.com/corporate-aviation-intelligence/airc...
From a technical perspective it's actually an interesting problem because there are so many things to consider. Really makes you notice how disadvantaged retail traders are, though. I think traditionally a lot of hedge fund strategies are kept pretty secret, but this one is so out of reach and technically difficult for most people that they don't really care if it gets out.
Really, what they are likely comparing is the relative changes in parking lot occupancy over time. So it’s not necessary to have complete coverage of all parking lots. You just need enough coverage to make the prediction with a certain level of confidence.
Unless your thesis is people who park underground shop differently. That is a valid idea and you cannot answer it via this study. However you can study it by other means if you believe this is important.
Or you might be saying having alternative methods to count traffic like cameras or other ground based counters.
The game here is essentially to get noisy signals about companies earlier than the official ones provided by the company. Take satellite pictures of parking lots, do phone surveys of consumers, count trucks leaving supplier companies, whatever. If it's a good predictor, you know upcoming price moves early, and can likely make significant profits off of it.
Remember the Matt Levine test: insider trading is about theft, not fairness.
When a company insider uses private company information to trade (or colludes with an outside party to do so) they are stealing material non-public information from the company for their own benefit. Nothing of the kind is happening when a hedge fund (or anyone else) acquires and analyzes satellite photos.
There is no expectation of fairness in the stock market. All sorts of people work very hard and spend a lot of money to develop proprietary information in the pursuit of stronger returns. There is nothing at all wrong wit this, especially because it means that in the end we all get more accurately priced securities.
Retail has no business in the securities market. thats where it ends up. stop playing. retail investors flocking to the stock market is a 40 year old meme that is built upon non-objective thought and gullibility. It is built on laziness. Retail doesn't meme commodities because there is almost no lazy investing approach to it. But the reality is that there are other capital markets. Retail isn't helping the stock market, they aren't helping the companies they like by buying stocks they "recognize", they are MAYBE lowering borrowing costs for the company, its executives and employees, but retail's trading has nothing to do with anything.
It's built on desperation.
There were some solid ways to develop retirement strategies with lifelong careers, pensions, and other older retirement vehicles. However, pensions are largely irrelevant outside the public sector now, the older retirement vehicles have stagnated/become poor investments (like annuities, which have become a landmine for terrible fees), and what was left was 401ks and individual retail stocks.
Mutual funds are a similar landmine, where transparency is lost and they're often built for the tax particularities of retirement accounts.
That leaves retail and... ETFs, which we can only wait for someone to find an angle to extract more value at the expense of small investors' returns.
It is pretty amazing and ingenious.
No, it doesn't undermine the observation that retail shouldn't be playing.
that's just not true and is a gross over simplification. for one, not beating the market is NOOOOOT the same as losing money. For another, even if they do not beat the market, there are a lot of other benefits.
People gain an understanding of how things like bonds and equities work. I cant tell you how many people (masters degree included) think you can loose more money than you invest by buying a stock. I seen someone literally not participate in 401k matching because of that thought.
there is something to be said about having greater control over one's money. When someone says lets eat out at this expensive 150$ plate restaurant, I think gee I can buy X shares of Y stock instead.
I personally have already maxed out my 401k, and if I want to retire I need to contribute more. currently I am beating the market, and I have little care if 'the average investor' isn't. it gives me something to do, empowers me, and is not 'at best' gambling.
I personally invest primarily in well diversified, extremely low cost ETFs and I buy 1 - 2 positions a year outside of that portfolio (right now the main one is bitcoin for me). But, I'm always looking around for something that I think can be a 10X return.
But... I rely on my primary diversified portfolio for my retirement and the single 1 or 2 investments I make outside of that are for fun, knowledge and I fully acknowledge gambling.
Nothing wrong with being investment savvy and all that jazz but obsessing over it doesn't sound healthy.
People can enjoy a fancy plate or 2.
Personally I find the above work boring - it ends up being a full time job, so once I subtract my salary I'm not really better off financially than an index fund and I'd hate my job.
As for why don't the big guys do this: it isn't worth their time to chase a small gain (say $20,000) so there are many things the small guy can do that are more than wroth it that is beneath the notice of the big guy. They know about these things, they need to make more money to pay for their overhead.
I'm not even sure there is a valid distinction between the two groups. The retirees are shareholders.
It is quite literally dumb and fucked up to tie comfortable retirement to things like releasing carbon into the atmosphere, or defense industry profits, or Wal-Mart's quarterly profits, or to the stability of Jeff Bezos' marriage.
But couldn’t you argue in exactly the same way for disenfranchisement? Do you think retired people should be allowed to vote?
I believe that everyone has a human right to vote. However, retired people have generally already established themselves; therefore, the changes that government makes, particularly on social issues, has minimal effect on them. Therefore, I think its unfair for the generation who is still establishing themselves not to be held hostage to the previous generation's vision of society.
I think you have one more negation than you intended in that sentence.
The upshot is that for a year in which market indexes are up 9.1% and the smartest investors do much better, Pat Q. Public can still earn maybe 8% as a retail investor in single stocks if she/he doesn't churn it all away in overly rapid trading. That's not a bad outcome.
Stragglers will stay in the game for a long time in such a scenario.
Alpha (the skill/edge component) is the excess return on a risk-adjusted basis.
Roughly, alpha is total-return - risk-free-rate - porfolio-beta * (market-return - risk-free-rate).
You can have a total return of 20%, a risk free rate of 3%, a Beta of 2, and a market return of 13% and you've actually underperformed the market on a risk-adjusted basis. Your alpha would be 20% - 3% - 2 * (13% - 3%) = -3%
The point of the stock market is not to let small or large investors become rich. It's to provide funding to companies.
If there is a distribution of skill in investors, using mutual funds might prevent you from being in the lower percentiles of under-performing investors. However if you really have a strategy that involves taking the market price that manages to consistently under-perform, then you could make money off of that strategy too.
If they're not the smarter analyst then yeah they're going to lose i.e. not outperform the market. Of course that doesn't mean that they'll lose money.
I must be dumb, but I don't understand this statement... How is that a "theft"? You knowing that I eat 2 eggs in the morning when I don't want people to know is not you "stealing" information from me.
From an outsider perspective like me (I don't own stocks except through my 401k), Wall Street seems like a game of information asymmetry anyway where the only winners have an information edge at some moment in time. Now the question is about how "fairly" was the information obtained which seems pretty blurry to define to me.
Suppose you are giving a prize for someone who guesses how many eggs you eat in the morning. If I watch you checkout at the grocery store and based on the number of eggs you buy, guess that you eat 2 eggs a day, and win the prize, that is not theft.
If however your chef who prepares you breakfast every morning “guesses” you eat 2 eggs, then that would be problematic.
If the chef working in your restaurant sells a cake he made there and puts the money in his pocket instead of yours, that's theft. It's legal to sell cakes the chef made, it's just the the resulting value belongs to the employer and not to the chef personally.
If the chef working in your restaurant sells some of the cooking ingredients and puts the money in his pocket instead of yours, that's theft. It's legal to sell spare cooking ingredients from a kitchen, it's just that the resulting value belongs to the employer.
And in the exact same manner, if the chef working in your restaurant sells the customer order statistics (e.g. how many eggs were eaten) and puts the money in his pocket instead of yours, that's theft. It's legal to sell customer order stats, it's just that as far as those stats have value, that value belongs to the employer and not to the chef personally.
When I take information entrusted to me by my company and use that information to profit in the market, I have taken information, used it in a manner not authorized, and profited.
That's different from someone else unaffiliated with the company independently deriving the information, using it in the market, and profiting.
As an example, the researchers who discovered VW's cheating on diesel emissions tests (assuming they were independent) would be perfectly within their rights to short or buy puts on Volkswagen. VW executives who were responding to the EPA inquiry or otherwise discovered the cheating would not be within their rights. In both cases, there was a moment where that information was material to the valuation of VW and not public, yet one group could legally trade on it and another could not.
Correct, you don't necessarily have to "steal" that information to find it out.
If you hire me to cook to you breakfast with the understanding that your breakfast habits are confidential and I give that information away, then that is "stealing" information because I have a duty to keep that information private.
If I spy on you while you are eating and figure it out and give the information away, then I did not "steal" the information because I don't have a duty to keep that information secret.
While appreciating the usefulness of this quote, one should also understand that usefulness is limited by the actual enforcement of insider trading laws and insider trading doctrine generally, which does not square with the analogy. There is certainly an element of "fairness" that is being protected implicitly and/or explicitly in enforcement actions, with the purported interest of keeping the markets attractive to retail investors. On the other hand, "fairness" is undermined in cases like Enron where prohibitions on insider trading likely artificially reduced downward pressure on the price of the stock (costing investors who bought later larger losses) by disallowing folks who understood what was going on from selling the stock.
I believe the counter argument is only people with enough wealth to afford an account at one of these hedge funds gains an immediate advantage here. So it's yet another way "the rich get richer."
Doesn't bother me, but I can see why other people would have a problem with it. And I severely doubt more than 5% of the planet cares about whether "in the end we all get more accurately priced securities."
Accurately priced securities are like a responsive public health system or redundancy in the electricity grid. Almost nobody cares about these things directly.
Yet virtually everybody enjoys the enormous gains in material living standards that are facilitated by having these things in place.
Better data yields more efficient markets which is what we actually want.
“Technology was supposed to level the playing field, but what I see is the fence separating sophisticated and unsophisticated investors growing higher,” says Patatoukas
As if that's a bad thing or a surprise to anyone...
By being correct about a stock in a trade you end up being rewarded for decreasing the cost of capital of companies that do the most with it.
And just a minor quibble, a more accurate stock price doesn't always lower the cost to a particular company of raising money. It makes the market more efficient over all, for sure, but often companies would prefer a less accurate (ie, higher) stock price for the purposes of raising money.
Needless to say, I'm not convinced that this kind of volume is necessary to get most of the benefit of the stock market as a price discovery mechanism. I'm not saying anything needs to change, I'm just not sure it's such a huge public good.
I wonder if the author is thinking of groups that suspected the 2008 crash but either didn't raise the alarm and made bets on the outcome or weren't heard in the commotion. Any proprietary information they might have had could have alerted the public or something but there's always noise or incorrect predictions about the market and hindsight is 20/20. If their worldview is that private groups controlling information for private gain is bad, well that's already going on so this is just an extension of that.
I'm sure most funds have groups looking into data collection on top of modeling market results based on various inputs the data suggests. I'm sure most funds have some amount of proprietary data or algorithms to run against it, even if the info overlaps or they sourced from the same information like publicly available government released satellite photos. I'm sure that the market (mostly computer programatically trading) reacts fairly quickly to big players making less than subtle moves. There may be some method to deciding how far to go with certain information to not tip your hand or reveal information by inference. It's how the whole thing works already, and dropping into a mutual fund seems the best way to take advantage with minimal risk.
There is no market regulatory philosophy that says "thou shalt not profit from working harder or smarter." Rather, working harder/smarter is encouraged, because when information is discovered, the new owner of that information acts on it in such a way that it creates price pressure in the market to push that security to be more accurately priced.
This is an unalloyed good. Yes, the people who get the information may profit from it, in a similar way any capitalist profits by reacting to price signals. There is no guarantee that all information should be available to everyone. If your information gathering is better and more determined, and your analysis superior, you may profit more than those who do not put in the effort.
One can get API access just like that? If so then I'm interested, might be fun to dabble with--can you name some of these providers?
Also, there are armies of vendors selling all kinds of data to hedge funds, the satellite data providers are just good at getting splashy articles written.
I am genuinely curious how that benefits me (or the average joe).
Err, no he is not wrong to confuse it.
Is satellite imagery public information? Is that something a person in the normal public could acquire even if they wanted to?
If it's not public and the results of the imagery are material... then it's material non-public information and it's illegal to use it for trading purposes.
>All sorts of people work very hard and spend a lot of money to develop proprietary information in the pursuit of stronger
But they should be doing it under the umbrella of PUBLIC information. If not, then yes it is completely "unfair". Your bullshit about there should be "no expectation of fairness in the stock market" is just silly.
the article is exactly right to present the professors’ opinion as-is.
I think it's incumbent on good journalists to put the views of the people they interview in the proper context. If the subject of an article says something wrong, and the article fails to point that out, it is a lie of omission.
And given how difficult it is to define insider trading that seems like a pretty accurate assessment to me. Alternative data firms are the new expert network firms in the wake of Rajaratnam.
You are making the same mistake the article does when you state this line is blurring.
I didn’t realize it was so cut and dry. How silly of me! I guess all of the work I’ve done providing legal advice to hedge funds on what is and isn’t insider trading since Preet Bahara first came to town was for nothing. Thanks for clearing that up.
I fail to see the parallel with Rajaratnam, since Rajaratnam was accused and convicted of insider trading on the basis of leaking from corporate insider executives(!) That's precisely the distinction that is being drawn in the comments here, between theft of insider information and the acquisition of difficult-to-intuit public information.
To answer your question, these parts:
> But technology is increasingly blurring the boundaries between public and private information, creating data opportunities that are legal, but are expensive and often require special expertise to access. “Technology was supposed to level the playing field, but what I see is the fence separating sophisticated and unsophisticated investors growing higher,” says Patatoukas, who is passionate about teaching his students to analyze public sources of financial information and finds the trend troubling. “That’s the dark side of big data. Our evidence suggests that unequal access to alternative data leaves individual investors outside the information loop.”
> In the aftermath of the financial crisis, there has been increased regulatory interest in the role of informed trading and disclosure requirements to protect the fairness and integrity of capital markets. With this in mind, Patatoukas hopes that the paper will get the attention of the regulators. “In a market setting where the line separating public from material non-public information is getting blurrier, the question that regulators need to answer is: What is their role in terms of leveling the playing field for individual investors?”
...until people are forced to play the game by external conditions, e.g. being employed and therefore having a pension that is based on funds.
Hedge funds also fly cesnas over refinery fields to look at the levels of those big tanks you see off the highway... most of them have roofs that move up or down with capacity, and those that don't you look at with an infrared camera to look at relative temperature differences.
1. They are just trying to ride the ML hype train and they sell effectively polished turds to board member buddies. This is the vast majority of the alt data and analytics firms. They have flashy dashboards and allow you to drag&drop together models and data. The whole thing looks very fancy during the sales pitch. It's all animated and shows charts that impress CEOs. Then when your quants get hold of the data they discover that it's real world predictive power is zero.
2. They actually discover valuable data or build models that genuinely produce an edge on the market. These either turn into hedge funds or are bought by an existing hedge fund to run the model in house. You rarely hear of these because their offering is public only briefly or not at all.
https://www.economist.com/finance-and-economics/2019/02/28/n...
Something I'm wondering about though: The article makes it sound like this is some new unfair advantage of the big traders. But isn't this an old game? If you can afford to acquire and process the data you're likely going to beat the other participants. That was always true. I don't see what's qualitatively different here. Is there?
A world in which nobody bothered to check whether a company was actually producing anything would turn the stock market into a collective guessing game.
This is kind of a thing in China.
Finding someone successful at stock picking and asking him what he did to be successful is like finding that 1 out of 1024 person who flipped a coin heads 10 times in a row and asking him what makes him such a great coin flipper.
The hard part is not regressing to the mean, and consistently beating the market, which sure, nobody can do. But if I learn today that a stock is going to rise tomorrow, and I buy as much as I can, the stock will rise a bit today. So the market has become a little bit more efficient.
That I happen to then base all my subsequent trades on overconfidence and tossing darts doesn't retroactively invalidate that trade. You can even make a market more efficient on losing trades- you short a stock, it goes down a bit, but you spend more maintaining the short than the stock goes down. Then, the stock crashes after your short expires. Oops! But your prediction was still partly right, and that information was integrated into the price a bit earlier than it would have been without you.
That's not too surprising. Isn't that the entire motivation?
Eamon Javers' book Broker, Trader, Lawyer, Spy covers some cases of this sort of thing. One I can easily remember is a hedge fund flew private planes around taking areal photos near power plants. Coal fire power plants store their fuel out in the open and they buy it by the train-load, so they were able to time the market based upon when power plants were going to make large coal purchases, as they do it when their piles of coal reach a certain size. I don't remember the numbers quoted in the book but they made money doing this, it was a couple percent.
It's only unfair if you think your 401k or personal trading account is/can/will grow anything like what hedge funds do. This coal market manipulating fund, they put money in, flying planes around and taking pictures isn't free, then they did analysis on the pictures which wasn't free, then they put real money in to the market to bet on it moving a certain way... which they are really only allowed to do because there is a counter-party that is willing to take that bet on. If it were really egregious, you could argue that the folks buying energy at incrementally higher rates are getting the shaft and that's not really fair but their energy provider could be smarter about when it orders up fuel. Once it goes public, the players and market tend to react to it
The alternative is a Soviet-style disconnection from reality. A market planner in a far-away office planned for a farm to produce some amount of output, so, that's how much the farm officially put out, nevermind that there was a drought and part of the output was diverted to the black market etc. But how is the planner supposed to know? Without feedback, without the truth, it becomes impossible to come up with accurate numbers for anything. Without the truth, the economy is a house of cards.
Especially as it related to big-box retailers.
This is better of course, but nothing you can't do in some other way with a little work.
"Some of Mr. Lynch's best picks came from watching his three teen-age daughters shop at a nearby mall,..."
https://www.baltimoresun.com/news/bs-xpm-1993-03-09-19930680...
All the satellites do is automate the work and I'm pretty sure hedge funds have been using satellite pics for well over a decade now. (I recall reading about the parking lot use case pre-2010) So really all that's changed is that they're now using ML to automate most of the work that analysts used to do manually.
I worked at one of the companies doing machine learning on top of large quantities of satellite imagery and selling the results.
It's more than a little work; it's pretty challenging, in a variety of ways. Just the training aspect is surprisingly difficult to get right.
We should not aspire to drag hedge-fund research down to the Main Street level. If there is a place for government in this context, it is to fund the education necessary to help retail investors learn a) how to take beneficial approaches to investing and risk, b) to appreciate the realities of trading against professional investors, and c) to understand how to conceive, test, and implement their own hypotheses in the real world.
In general, an informed market is a healthy one.
What about companies that find out about your retail trade before it's even executed, and are able to act on that information to profit from your very intent to trade?
Front-running is very common in bond trading.
They are market-making, which is something else entirely than front-running.
It's often claimed that HFT help make markets more liquid and efficient, "which helps everyone".
It's much less than clear whether the presence of HFT helps make an entire market more efficient, or whether just the HFTs are able to benefit.
Are you sure it's illegal if it's a hedge fund with access to order flow from a third party?
"Front running is one of the easiest ways to make money. It's essentially insider trading, except the inside information isn't about corporate activity; the information is about client order flow. In this case, since the index investors are not their clients, it is legal for hedge funds and any independent traders to front run them. One could argue that the hedge fund managers are doing nothing wrong; it's the investors' fault for acting irresponsibly. The problem with that argument is that many of these investors don't have a clue about what is happening to them." [0]
http://www.dark-bid.com/hedge-funds-front-running-investors....
Now about the Russel indexes - the article has a point there. They are notoriously shitty indexes. Nobody should be putting money into those. But still - nothing illegal(nor should it be). This is yes, clearly a case of "investors' fault for acting irresponsibly". Nobody is forcing them to use these indexes and this information isn't hidden anywhere. Last thing we need is 100 more regulations.
HF traders provide liquidity and market-making when it suits them. Doesn't that stop when it doesn't?
edit: found the article quoted last time I discussed this.
https://blogs.cfainstitute.org/investor/2013/04/24/what-to-d...
Larry Harris, Professor of Finance as USC;LA says
"A few high-frequency traders front-run buy-side traders who are working orders, thereby making the latter’s trades more expensive. Such activities are legal if the high-frequency traders do not improperly obtain information about the orders they front-run."
It's only profitable if you dont get caught. SEC will make a very expensive and public example if they catch you.
Source: +15 years in the industry, a number of which have been spent working in/with compliance.
Firms don't buy order flow from Robinhood in order to trade in front of those orders, they buy order flow from Robinhood to execute those orders for those customers which is a service that those customers pay for as purchasers of liquidity.
Retail orders are small and generally aren't capable of moving prices. Your order for 100 shares of whatever isn't going to move the price so you can't really make money ahead of it.
You should stop trading now.
That's always been the argument for index funds for regular investors, you're never going to compete with hedge funds, why waste your time?
What are you thinking about?
Indeed, it's negative. While the big funds steal money from small investors the waste of energy and the pollution caused by launching satellites remains.
Is becoming a popular choice for Hedge Funds seeking this kind of data.
Remote sensing like satellite is excellent for other similar types financial modeling applications, but I wouldn't use it for modeling retail as it is much too coarse.
>“What we found is that it’s a gain for large sophisticated investors who can afford the substantial costs of acquiring and processing big alternative data”
This is yet another example of wealth accumulating, of rich actors getting richer faster than poor ones. Without some controls on the behaviours that allow wealth to accumulate, it will further concentrate among the wealthy. I would argue that is a bad outcome.
Any game where you get more of an advantage the more points you accumulate from a fixed pool of points is going to rapidly result in an unequal share of the points going to the first person to acquire the advantage.
Monopoly was created as a game to warn of the pitfalls of capitalism (it's a simplified form of the winner takes if not all a disproportionate share scenario that is life)[1]
http://www.bbc.com/capital/story/20170728-monopoly-was-inven... [1]
Of course that I think this puts me at odds with many people, I like capitalism, I like the social pluses of it but I believe that capitalism should be sub-ordinate to society directly (more what you see in the north of europe) and less the other way around (pretty much most other places and arguably the US).
This is definitely a case of art imitating life though.