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This article is very wrong to confuse "material non-public information" with hard to acquire information like counting cars in satellite photos. Remember the M

by harryh 7y ago

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.

vostok 7y ago
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.
- davidw 7y ago
  I agree, but where's this end up? Why would retail investors play a game where they're almost certain to lose?
  - piker 7y ago
    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.
  - mrosett 7y ago
    They shouldn’t. Pick a Vanfuard fund, put your money in it, and check back in a couple decades.
    - davidw 7y ago
      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.
      - rolltiide 7y ago
        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.
        ebiester 7y ago
        Laziness? 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.
        rolltiide 7y ago
        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.
  - wtvanhest 7y ago
    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.
    - autokad 7y ago
      > "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.
      - wtvanhest 7y ago
        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.
      - lapnitnelav 7y ago
  - yellowstuff 7y ago
    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.
    - bluGill 7y ago
      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.
  - bongobongo 7y ago
    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.
    - javert 7y ago
      Why is trying the interests of retirees to shareholders "kind of dumb and fucked up"? I'm not even sure there is a valid distinction between the two groups. The retirees are shareholders.
      - bongobongo 7y ago
        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.
        lovecg 7y ago
        > 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?
        harimau777 7y ago
        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.
  - GCA10 7y ago
    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.
    - aswanson 7y ago
      Right. Even Jim Simons of Renaissance Technologies, has publicly stated that their edge is small. They amplify it with leverage, like all funds do.
      - sokoloff 7y ago
        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.
        aswanson 7y ago
        Obviously, but he stated it indirectly; the way he said it was as an aside. But you're right re: his motivations.
        rajacombinator 7y ago
        And yet he leaks the returns of their private fund every year...
        sokoloff 7y ago
        The returns of the fund alone don't tell you the level of edge (alpha) of RenTech. 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%
  - H8crilA 7y ago
    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.
  - atemerev 7y ago
    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.
  - p10_user 7y ago
    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.
  - rz2k 7y ago
    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.
  - arawde 7y ago
    https://www.etf.com/docs/IfYouCan.pdf https://www.etf.com/docs/IfYouCan.pdf
  - jgalt212 7y ago
    b/c a well diversified portfolio of stocks will, in the aggregate, easily beat HF returns after 2/20 fees and even after 1/10 fees.
  - scarejunba 7y ago
    Because retail investors will beat the hedge funds by dumb spending on index funds.
  - vostok 7y ago
    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.
- dinkudunk 7y ago
  Does this feel like a straw man to anyone else?
deleted 7y ago
[deleted]
mochomocha 7y ago
> 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.
- piker 7y ago
  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.
  - mochomocha 7y ago
    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.
    - squaresmile 7y ago
      From the shareholders (owners) whom they have duty to.
- JimmyAustin 7y ago
  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.
piker 7y ago
> 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.
isoskeles 7y ago
> 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."
- buzzdenver 7y ago
  There are plenty of publicly traded hedge funds that any investor can buy into. BlackRock, Blackstone, Berkshire Hathaway..
- dcolkitt 7y ago
  > 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.
  - isoskeles 7y ago
    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.
ttobbaybbob 7y ago
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...
- JackFr 7y ago
  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.
  - ksdale 7y ago
    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.
    - ttobbaybbob 7y ago
      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.
      - ksdale 7y ago
        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.
pacoWebConsult 7y ago
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.
grouseway 7y ago
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?
- yellowstuff 7y ago
  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.
- tanderson92 7y ago
  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.
reggieband 7y ago
> it means that in the end we all get more accurately priced securities. I am genuinely curious how that benefits me (or the average joe).
- JackFr 7y ago
  By giving you an an economy that puts capital where it is most efficiently used.
mrlala 7y ago
> 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.
boh 7y ago
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.
techslave 7y ago
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.
- harryh 7y ago
  I disagree. 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.
elliekelly 7y ago
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.
- harryh 7y ago
  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.
  - elliekelly 7y ago
    > 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.
    - kbenson 7y ago
      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.
- tanderson92 7y ago
  > 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?”
eeZah7Ux 7y ago
> There is no expectation of fairness in the stock market ...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.

by harryh 7y ago

vostok 7y ago

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.

davidw 7y ago
I agree, but where's this end up? Why would retail investors play a game where they're almost certain to lose?
- piker 7y ago
  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.
- mrosett 7y ago
  They shouldn’t. Pick a Vanfuard fund, put your money in it, and check back in a couple decades.
  - davidw 7y ago
    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.
    - rolltiide 7y ago
      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.
      - ebiester 7y ago
        Laziness? 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.
        rolltiide 7y ago
        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.
- wtvanhest 7y ago
  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.
  - autokad 7y ago
    > "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.
    - wtvanhest 7y ago
      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.
    - lapnitnelav 7y ago
- yellowstuff 7y ago
  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.
  - bluGill 7y ago
    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.
- bongobongo 7y ago
  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.
  - javert 7y ago
    Why is trying the interests of retirees to shareholders "kind of dumb and fucked up"? I'm not even sure there is a valid distinction between the two groups. The retirees are shareholders.
    - bongobongo 7y ago
      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.
      - lovecg 7y ago
        > 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?
        harimau777 7y ago
        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.
- GCA10 7y ago
  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.
  - aswanson 7y ago
    Right. Even Jim Simons of Renaissance Technologies, has publicly stated that their edge is small. They amplify it with leverage, like all funds do.
    - sokoloff 7y ago
      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.
      - aswanson 7y ago
        Obviously, but he stated it indirectly; the way he said it was as an aside. But you're right re: his motivations.
      - rajacombinator 7y ago
        And yet he leaks the returns of their private fund every year...
        sokoloff 7y ago
        The returns of the fund alone don't tell you the level of edge (alpha) of RenTech. 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%
- H8crilA 7y ago
  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.
- atemerev 7y ago
  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.
- p10_user 7y ago
  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.
- rz2k 7y ago
  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.
- arawde 7y ago
  https://www.etf.com/docs/IfYouCan.pdf https://www.etf.com/docs/IfYouCan.pdf
- jgalt212 7y ago
  b/c a well diversified portfolio of stocks will, in the aggregate, easily beat HF returns after 2/20 fees and even after 1/10 fees.
- scarejunba 7y ago
  Because retail investors will beat the hedge funds by dumb spending on index funds.
- vostok 7y ago
  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.
dinkudunk 7y ago
Does this feel like a straw man to anyone else?

deleted 7y ago

[deleted]

mochomocha 7y ago

> 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.

piker 7y ago
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.
- mochomocha 7y ago
  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.
  - squaresmile 7y ago
    From the shareholders (owners) whom they have duty to.
JimmyAustin 7y ago
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.

piker 7y ago

> 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.

isoskeles 7y ago

> 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."

buzzdenver 7y ago
There are plenty of publicly traded hedge funds that any investor can buy into. BlackRock, Blackstone, Berkshire Hathaway..
dcolkitt 7y ago
> 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.
- isoskeles 7y ago
  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.

ttobbaybbob 7y ago

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...

JackFr 7y ago
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.
- ksdale 7y ago
  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.
  - ttobbaybbob 7y ago
    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.
    - ksdale 7y ago
      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.

pacoWebConsult 7y ago

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.

grouseway 7y ago

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?

yellowstuff 7y ago
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.
tanderson92 7y ago
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.

reggieband 7y ago

> it means that in the end we all get more accurately priced securities. I am genuinely curious how that benefits me (or the average joe).

JackFr 7y ago
By giving you an an economy that puts capital where it is most efficiently used.

mrlala 7y ago

> 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.

boh 7y ago

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.

techslave 7y ago

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.

harryh 7y ago
I disagree. 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.

elliekelly 7y ago

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.

harryh 7y ago
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.
- elliekelly 7y ago
  > 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.
  - kbenson 7y ago
    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.
tanderson92 7y ago
> 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?”

eeZah7Ux 7y ago

> There is no expectation of fairness in the stock market ...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.