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Capital One Fraud Researchers May Also Have Done Some Fraud

356 points by sirteno 12y ago

mahyarm 12y ago
So I wonder how much insider trading occurs via government spooks analyzing surveillance data that we don't know about. I doubt the SEC would be able to make a public lawsuit about this .
coob 12y ago
Wow. I'm actually quite impressed, in a 'that's impressively evil' kind of way. Maybe anonymized CC trend data should be made public?
- pc86 12y ago
  Criminal, yes. Immoral, probably. Evil? Of course not.
- edraferi 12y ago
  It's almost impossible to anonymize large data datasets like that. Significant aggregation is basically the only way to do it properly, and that significantly reduces the value of the data.
- unreal37 12y ago
  Evil is kind of harsh. It's actually clever. As the article says, a lot of hard work and risk went into these trades.
antr 12y ago
I genuinely think this is a grey area, and it's far from "insider" trading. Is it moral, I don't think so. Should Capital One sanction these employees, probably. But I think this is far from ilegal. Huang and Huang had access to a db which is not open to everyone, granted, but they had to extrapolate the stock direction based on data from a subset (customers who buy Chipotle with a CC), of a subset (with a Capital One card)... and then compare that to analyst expectations, etc. but then, would it be insider trading if I stood outside a Chipotle polling customers who exited on the dollar amount spent? That is also proprietary information, and one I can use to trade stocks on. I'd like to know if they did any trades where the return went south. I know of sector investment funds which pretty much do this all day long, forecasting all sorts of industries, and it's not ilegal. I'd like to know what others think.
- fnordfnordfnord 12y ago
  I think Capital One will package this and be selling it to hedge funds before the year is out.
- stillsut 12y ago
  Stats 101 - A sample of the total customers is sufficient to calculate the monthly average. As long as the sample size is sufficient (capital one credit cards) and the sampling method is not too biased (or in this case stedaily biased month-to-month). So yes this information appears highly valuable for forecasts as it gives customer amount and sales amount ahead of reporting.
  - antr 12y ago
    sure, i'm not debating that this isn't stats, but it's a skewed subset, skewed towards those who can afford to have a credit card. then, stats is far away from knowing confidential information. I don't know...
    - hueving 12y ago
      people that can't afford to have a credit card aren't in the crowd willing to spend $10 on a burrito
    - will_brown 12y ago
      At the end of the day I am not so sure the value of the information matters, even though in their case it turns out the data subset accurately reflected the larger picture (e.g. Capital One data was consistent with not just other credit card transactions, but cash as well). Nevertheless, one may still be committing insider trading by trading based on non-public information even if the bet was wrong. Though is such a circumstance they may not have come up on the radar.
- foobarqux 12y ago
  Legally it is very clearly insider trading: they misappropriated material non-public information and traded on it.
tomp 12y ago
Interesting, as the article notes - if Capital One had terms and conditions that said, "we can use sales data for unrelated purposes", they would be able to trade on that information themselves. I wonder who else has information that they're willing to use/sell to third parties... Facebook? Google? I wonder how predictive e.g. the ratios of likes of McDonald's/Starbucks/Chipotle pages are. Or clicks on display ads for Puma/Adidas shoes. > Surely lots of Wall Street firms -- Chipotle is followed by 31 analysts -- and asset managers are doing tons of research to try to estimate Chipotle's sales. They're visiting branches and calling investor relations and talking to pork suppliers and surveying consumers and generally getting paid a lot of money to build a robust estimate of how many burritos Chipotle is selling. One more piece of data -- one credit card company's charges at Chipotle -- would be helpful, but come on, not that helpful. Could we get this data any other way? How about putting cameras in front of a few flagship Chipotle stores and using CV to track the number of people going in/out? That's legal, AFAIK.
- foobarqux 12y ago
  No one would do business with them if they had such terms.
  - dangerboysteve 12y ago
    The sat company, SkyBox, Google purchased mentions using sat images for predictive analytics that can be applied to investment decisions. http://www.skyboximaging.com/products#analytics http://www.skyboximaging.com/products#analytics
    - TheOtherHobbes 12y ago
      Following the logic in the article, you'd get the most efficient markets by making all financial transactions public and instantly accessible. Then everyone would have the maximum possible amount of information, which would lead to maximally efficient pricing. For some reason I can't quite put my finger on, I don't expect this to happen any time soon. Which is one reason I remain skeptical that 'efficient pricing' has ever been a genuine goal.
fasteo 12y ago
metafraud, interesting concept
jliptzin 12y ago
This is probably going on right now in lots of other companies that have access to such data. We only hear about the ones that get caught. Seems like they didn't try too hard to cover their tracks. Just think about all the companies that have access to credit card data and all the people that are connected to those companies who could either be selling the data to others or trading on it themselves. Best thing to do to prevent this unfair advantage is releasing publicly available CC spend data.
- trentnelson 12y ago
  > Best thing to do to prevent this unfair advantage is releasing publicly available CC spend data. Who releases it? Every credit card company? At what frequency? What if one of the nightly bulk loads into the transaction data warehouse fails with an integrity error, alerts the DWH team, is picked up by a junior person because of a staffing anomaly, who forces it through, and then the next day's data release is off by a couple of million, but the automated trading bots and manual trading desks don't know this, so they trade on this new signal... ....I'm sure you see where I'm going with that.
wahsd 12y ago
Kind of highlights the true value of data that users are giving away with every single, in this case, transaction. I am not quite sure how one would go about an alternate method for assessing the actual value of user data, but it has always seemed rather obvious to me that it is hugely downplayed by all the self-interested parties and their defenders. Would it, in this case maybe be the change in market cap pre and post sales figures? But even that, as pointed out, has some increases baked in based on alternative research to estimate performance. I guess you would need to find a very specific company that really does not lend itself to outside, tangential research and that keeps its performance measures and metrics under wraps really well between announcements. Anyone have any idea of an industry or company that fits such a profile? Does anyone else realize we are really in and moving deeply into an era that is going to add significant opportunities for corruption and economic capture.
- willis77 12y ago
  The problem with ascribing dollar values to data (a.k.a. facts) is that you can make up a million untestable hypotheses about how data could theoretically have worth. To give an extreme but illustrative example: let's say that by typing this comment to you, I raise the temperature in my router by a millionth of a degree, which alters the wind pattern in my room, which causes butterfly to flap its wings, which... you get the point.. causes a hurricane in some remote part of the world. Does this make the "expected value" of my comment negative billions of dollars? You can back this argument out to less extreme versions and see that it's very difficult to economically value a fact. E.g. what if the traders named in this article had 100X the capital on the line for the same trade. Is the data now 100X more valuable because of the added economic value they derived from it? What if their trade netted them more than the change in market cap?
  - Dylan16807 12y ago
    That's an interesting counterargument, but it defeats itself. Expected value is about averages.
savanaly 12y ago
Just from reading the title I knew this would be a Matt Levine piece. Great, entertaining finance columnist.
- Nicholas_C 12y ago
  I thought the same thing. He has very snarky titles. My favorite one is "Law Firm Accountants Were Bad at Accounting, Law."
jlev 12y ago
These guys should start their own credit card transaction aggregator (ala Mint), and gather user data that is expressly made available for market research. Make the analysis for privacy tradeoff more explicit and distribute profits.
- snowwrestler 12y ago
  Or, use the trading profits to subsidize the processing fees. A credit card processor that charges 0% fee on transactions would have a huge advantage when pitching retailers.
  - seanp2k2 12y ago
    I like that idea way more than selling [aggregated, anonymized] consumer purchasing habit reports to advertisers, which is what I figure tons of payment processing companies are doing now (I have no source on this, but it seems obvious),
  - will_brown 12y ago
    Damn...waiving transaction fees is probably valuable enough to merchants, they would freely contract the right for the processor to utilize the information for those purposes. However, that information would still be non-public and likely run afoul of insider trading. That said nothing prohibits companies from making this information public in real-time and maybe it makes sense for the SEC to require publicly traded companies to make this information public in real-time.
    - sokoloff 12y ago
      I imagine this might fall under the mosaic theory (that non-insiders are able to undertake original research to correlate a wide variety of individually non-material data to form an opinion about a security). As far as I know, such actions (by non-insiders) do not fall afoul of insider trading prohibitions. Otherwise, how would stock analysis work? Whether a card processor's handling of financial transaction flow would be viewed as non-insider is something that I don't know. I can make reasonable arguments either way.
ScottBurson 12y ago
I'm starting to agree with the editorial linked from the article [0] that laws against insider trading are pointless. People find ways to do it anyway, but because the laws exist, the general public thinks it's rare. It might be better for everyone to know what shark tank they're jumping into. [0] http://www.wsj.com/articles/SB10001424052702304279904579516170211639290 http://www.wsj.com/articles/SB100014240527023042799045795161...
- savanaly 12y ago
  I find myself agreeing too, but tentatively. What exactly is the argument for insider trading laws in the first place? In the absence of such laws would managers have the wrong incentives?
  - cma 12y ago
    The money insiders make would otherwise go to other parties/counterparties when the news became public. Insiders charge a rent on everyone else. So do non-insiders doing above-board sales research, but they are subject to competition, keeping the rent/tax down. In addition to the rent, there is also a benefit provided in accurately pricing securities, but there is no law of economics saying this benefit will exactly cancel out the rent or anything of the sort. There are fundamental things (like limited number of sufficiently high-level insiders) restricting competition in conventional insider trading to minimize the rent charged from insider "research".
    - savanaly 12y ago
      Is it a transfer of income, or a genuine loss of resources? It seems like the losses to everyone else are offset one to one by the gains to the insider traders.
      - notahacker 12y ago
        It's not a zero-sum game if the effects are a disincentive to invest on the part of parties without strong connections to insiders.
Zarathust 12y ago
This reminds me of a quote by Eric Schmidt : "One day we had a conversation where we figured we could just try and predict the stock market..." Eric Schmidt continues, "and then we decided it was illegal. So we stopped doing that." They probably have thousands of employees who can access this information, I think it would be foolish to think that absolutely none of them does it for personal purposes.
- rayiner 12y ago
  The purpose of the law is precisely to make Eric Schmidt say what he did. In general, the law can't hope to prevent undesirable conduct, but only create social norms that prevent undesirable conduct at scale. Laws against murder won't stop jealous lovers from killing spouses, but do stop people from turning murder into a business. They won't stop casual drug use, but do stop Wal-Mart from getting into the meth business. Etc.
- voidlogic 12y ago
  So long as they used public information- why would it be illegal?
  - secalex 12y ago
    I once had an interesting discussion with a tech-savvy criminal attorney about whether security researchers could trade public equities using early indicators of compromise or private knowledge of 0-day (gained from outside the company, not under NDA). She thought about it a bit and said "The insider trading laws are so broad that if the US Attorney didn't like it they would make it illegal, and if you had talked to anybody about it they would go down for conspiracy." My interactions with the criminal legal system as an expert witness since then have only reinforced my belief in Harry Silverglate's axiom that pretty much every US adult is merely an un-indicted Federal felon living their lives at the mercy of the thousands of AUSAs who could plunge them into a living hell.
    - olefoo 12y ago
      And that is a problem, that we should solve.
shawnee_ 12y ago
The implications are bigger than for public companies' insider trading. Think about the success of the Oatmeal's Exploding Kittens card game on Kickstarter. Aside from the fact that KS's new payment processor Stripe is leeching an astounding amount of money from this campaign (where most pledges have probably been made with cash-like debit cards being charged at the rate of credit cards), there are also implications of aggregation inside that cartel. How many playing card printing companies out there are eager to handle that order? What if you knew ahead of time who they were going to use, based on that "bank account" info you have to give out when you sign up for a campaign on KS? Private companies leverage this info all the time, and it's much easier for them to get away with it.
ChuckMcM 12y ago
It reminds me of how search engines know about things like shopping cart exploits right away because all of a sudden there are thousands and thousands of queries for a particular shopping cart software package being used on a web page. Personally I agree with Matt that this is a not the usual kind of thing. Clearly Chipotle could anonymize their sales with dummy purchases but the actual numbers would still be there. Like a search engine, for the data stream (credit card charges) to work you are forced to put enough information in the transaction to identify it. This is also something I see happening with IoT type technologies, when it becomes possible for someone to collect data on their own at thousands of locations for relatively small numbers of $, like the helicopters trying to estimate oil availability, you'll have data streams that can inform economic activity. Imagine something like a cellphone sized thing with a camera that just counts customers using OCV to note blobs at the counter, in a restaurant and texts a tally once an hour. Seems ridiculous but its quite possible to do, and much more cheaply than just repurposing disposed cell phones (although that works too).
patcon 12y ago
for better or for worse, the establishment of decentralized prediction markets will essentially make insider trading laws moot. Who cares if you can't bet on the original market when you have another unregulated market where you can bet on the veracity of the first? http://www.augur.net/#what-we-do http://www.augur.net/#what-we-do http://www.truthcoin.info/ http://www.truthcoin.info/
- harryh 12y ago
  Why would anyone who does not have access to insider information participate in an unregulated market when you have easy access to a regulated one?
ForHackernews 12y ago
Couldn't this kind of thing be easily solved by having companies release sales data more frequently? It seems like the only reason this is profitable is because earnings are released quarterly, so there's opportunity for the stocks to become wildly mis-priced over those months. What would the downside be for releasing earnings data daily, or even weekly or monthly?
- ta33 12y ago
  lol
aptimpropriety 12y ago
Have a look at 1010Data: https://www.1010data.com/solutions/by-industry/financial-services/ https://www.1010data.com/solutions/by-industry/financial-ser... and https://www.1010data.com/partners/detail/data-providers https://www.1010data.com/partners/detail/data-providers This stuff is already being done legally, with certain industries and within certain financial institutions. Just seems like these guys were just caught in an unfortunate legal snag - otherwise they just seem like good traders to me.
deleted 12y ago
[deleted]
DevX101 12y ago
How did these guys get caught?
- unreal37 12y ago
  Yes! That's the question! Was it that they were too successful trading, or was it their employer (or a co-worker) reporting on their side-business to the SEC.
- nandemo 12y ago
  Not sure about the US but this is more or less what happens in Japan: Brokerages are obligated to flag and report suspicious orders or trades to the [equivalent of] SEC. If necessary, the SEC then asks the brokerage for more information and investigates it. The definitions of "suspicious" can be somewhat arbitrary, but those >1000% returns would definitely be considered suspicious. Two people at the same workplace getting abnormally high returns would also be considered a red flag.
adrr 12y ago
Big question. If they setup a hedge fund and bought the data from the card issuer, and did the exact same thing. Would it be legal? Don't they use private satellites to take pictures of mall parking lots and crop fields to estimate holiday sales and crop yields? Hows is this different. Its data that public doesn't have access to.
- thedufer 12y ago
  You're describing a world in which said data is available on the market, which is already a drastically different world than the one we live in. I would be surprised if they can legally sell that data - surely credit cards come with a privacy clause?
  - adrr 12y ago
    All the banks sell their data. Its aggregated but thats all you need. You don't care if a specific person went to Chipotle, you're looking for trends. http://www.businessinsider.com/credit-cards-sell-purchase-data-to-advertisers-2013-4 http://www.businessinsider.com/credit-cards-sell-purchase-da...
    - rwmurrayVT 12y ago
      I think this data is delayed. I don't care if there were 1.000.000 chipotle customers in Virginia two quarters ago.
joncp 12y ago
I see a lot of comments about how they could have figured out this data by just counting customers outside some Chipotle restaurants. This misses a key point: using their massive database, they were able to sift through thousands and thousands of businesses and actually figure out that Chipotle was one to watch. Without that data, they wouldn't know where to put their customer watcher. If they were a little savvier, they could have used their data from CapitalOne to decide which businesses to research and then create shill research, much like the FBI's "parallel construction" of evidence. I wonder whether that would have put them in the clear; when the SEC came knocking, they could have pulled out their research, saying "Look, we figured this out fair and square."
- pbhjpbhj 12y ago
  Wonder how closely footfall at high-street traders equates to their revenue - pretty close I'd imagine? I'm thinking whether a firm running city centre CCTV could do this with some computer vision systems. Mobile phone operators and ISPs that serve businesses must have similarly closely correlated signals to hand too.
  - poikniok 12y ago
    What exactly does your first sentence mean? Trying to parse it and do not understand what "footfall at high-street traders" means.
    - deleted 12y ago
      [deleted]
    - mkehrt 12y ago
      "Foot traffic at high-end stores"
    - pbhjpbhj 12y ago
      as mkehrt says. >"Wonder how closely footfall at high-street traders equates to their revenue - pretty close I'd imagine?" To put it another way: I was thinking that the number of people who go in to shops in the high-street might correlate well with the revenue for those same shops.
unreal37 12y ago
I think they were primarily a victim of their massive success. If they had only made $500,000 instead of $2.8 million, they might still be going along fine. How did they get caught? Did the SEC see this account has 1,800% return on investment over 3 years and investigate who owned it? Or did Capital One discover some odd queries on their production database and report them to the SEC?
- zaroth 12y ago
  I think generally it's the large unhedged options position that makes 10x after an earnings surprise that gets noticed. To your point, yes I think in this case pigs got slaughtered.
raincom 12y ago
Workaday co-CEO Dave Duffield said in some interview that he invests privately in the companies that buys Workaday cloud hr solution. If he can sees how many employees are added to a certain company that buys Workaday cloud product, he can use that an edge.
downandout 12y ago
This is a stretch of insider trading laws, which I assume is why they haven't been charged criminally (the SEC can only pursue civil sanctions). The data was in the possession of their employer, not of the publicly traded companies. They could probably be prosecuted under the CFAA for misusing a protected computer system, but I cannot imagine them being convicted criminally for insider trading here, or even losing at trial if they choose to fight the civil SEC case. If I pay people to go count the number of customers in line at a representative sample of Chipotle restaurants during lunch every day, compare the results to the previous quarter where I was doing the same thing, and trade on that data, is that illegal? It's nonpublic information. Would my employees be prosecuted for this if they traded on it? Prosecutors and the SEC attempt to stretch our laws every day. It doesn't mean that they are going to win these cases.
- jsprogrammer 12y ago
  How is observing lines of Chipotle customers private information? Anyone can do it. Anyone CANNOT query Capital One's transaction databases, which is the entire problem here. Make the transaction databases public (Bitcoin does) and open the casino to everyone else.
  - downandout 12y ago
    The point is that this wasn't private information, and it was not in a database that was the property of the target businesses. It didn't come from inside the company. Hence no "insider trading".
    - jsprogrammer 12y ago
      Can you link me to the database used?
- RockyMcNuts 12y ago
  What if Chipotle signed an agreement with Visa and their credit card processor saying that their data wouldn't be provided to traders to trade their stock on? What if Capital One signed an agreement with Visa saying that in exchange for issuing cards, they wouldn't provide the data to stock traders, and would keep it safe? What if they didn't trade on it, just sold the info to Taco Bell? Seems like a situations I want to avoid, if I'm Chipotle.
linuxhansl 12y ago
The point is not whether somebody does a lot of research or not. The point is whether he/she had data available that is not available to the public. That is simply not fair. Now, using helicopters to track oil tankers - as described in the article - seems to be a blurry line, but in theory anybody could do that and then use that information, it is available to everybody... In principle at least. This data was entirely private, so I would agree with being not fair. That said, I hope these guys do not have to go to jail, but are simply forced to pay their gains (or a portion of those) back, maybe as a fine.
kosei 12y ago
I've always felt this would be a really interesting job to have. The ability to look at a CC company's data and be able to generalize market trends. There are so many questions I'd want to ask about socioeconomic status and impact on debt, fraud, specific types of purchases, etc. It'll never happen, but someone should give a big data firm unfettered access to answer some interesting societal and behavioral questions.
clebio 12y ago
> That's amazing! These two like customer-support guys... > You sometimes see insider-trading cases where someone makes like a thousand-percent return... Am I the only one bothered by the author's writing? Am I getting old? Conversational is ok, I guess (though, Bloomberg?). But these "like"s? They're not 'like customer-support guys', they are customer-support guys (or else they are analysts). Bah-humbug.

356 points by sirteno 12y ago

So I wonder how much insider trading occurs via government spooks analyzing surveillance data that we don't know about. I doubt the SEC would be able to make a public lawsuit about this .

coob 12y ago

Wow. I'm actually quite impressed, in a 'that's impressively evil' kind of way. Maybe anonymized CC trend data should be made public?

pc86 12y ago
Criminal, yes. Immoral, probably. Evil? Of course not.
edraferi 12y ago
It's almost impossible to anonymize large data datasets like that. Significant aggregation is basically the only way to do it properly, and that significantly reduces the value of the data.
unreal37 12y ago
Evil is kind of harsh. It's actually clever. As the article says, a lot of hard work and risk went into these trades.

antr 12y ago

I genuinely think this is a grey area, and it's far from "insider" trading. Is it moral, I don't think so. Should Capital One sanction these employees, probably. But I think this is far from ilegal. Huang and Huang had access to a db which is not open to everyone, granted, but they had to extrapolate the stock direction based on data from a subset (customers who buy Chipotle with a CC), of a subset (with a Capital One card)... and then compare that to analyst expectations, etc. but then, would it be insider trading if I stood outside a Chipotle polling customers who exited on the dollar amount spent? That is also proprietary information, and one I can use to trade stocks on. I'd like to know if they did any trades where the return went south. I know of sector investment funds which pretty much do this all day long, forecasting all sorts of industries, and it's not ilegal. I'd like to know what others think.

fnordfnordfnord 12y ago
I think Capital One will package this and be selling it to hedge funds before the year is out.
stillsut 12y ago
Stats 101 - A sample of the total customers is sufficient to calculate the monthly average. As long as the sample size is sufficient (capital one credit cards) and the sampling method is not too biased (or in this case stedaily biased month-to-month). So yes this information appears highly valuable for forecasts as it gives customer amount and sales amount ahead of reporting.
- antr 12y ago
  sure, i'm not debating that this isn't stats, but it's a skewed subset, skewed towards those who can afford to have a credit card. then, stats is far away from knowing confidential information. I don't know...
  - hueving 12y ago
    people that can't afford to have a credit card aren't in the crowd willing to spend $10 on a burrito
  - will_brown 12y ago
    At the end of the day I am not so sure the value of the information matters, even though in their case it turns out the data subset accurately reflected the larger picture (e.g. Capital One data was consistent with not just other credit card transactions, but cash as well). Nevertheless, one may still be committing insider trading by trading based on non-public information even if the bet was wrong. Though is such a circumstance they may not have come up on the radar.
foobarqux 12y ago
Legally it is very clearly insider trading: they misappropriated material non-public information and traded on it.

tomp 12y ago

Interesting, as the article notes - if Capital One had terms and conditions that said, "we can use sales data for unrelated purposes", they would be able to trade on that information themselves. I wonder who else has information that they're willing to use/sell to third parties... Facebook? Google? I wonder how predictive e.g. the ratios of likes of McDonald's/Starbucks/Chipotle pages are. Or clicks on display ads for Puma/Adidas shoes. > Surely lots of Wall Street firms -- Chipotle is followed by 31 analysts -- and asset managers are doing tons of research to try to estimate Chipotle's sales. They're visiting branches and calling investor relations and talking to pork suppliers and surveying consumers and generally getting paid a lot of money to build a robust estimate of how many burritos Chipotle is selling. One more piece of data -- one credit card company's charges at Chipotle -- would be helpful, but come on, not that helpful. Could we get this data any other way? How about putting cameras in front of a few flagship Chipotle stores and using CV to track the number of people going in/out? That's legal, AFAIK.

foobarqux 12y ago
No one would do business with them if they had such terms.
- dangerboysteve 12y ago
  The sat company, SkyBox, Google purchased mentions using sat images for predictive analytics that can be applied to investment decisions. http://www.skyboximaging.com/products#analytics http://www.skyboximaging.com/products#analytics
  - TheOtherHobbes 12y ago
    Following the logic in the article, you'd get the most efficient markets by making all financial transactions public and instantly accessible. Then everyone would have the maximum possible amount of information, which would lead to maximally efficient pricing. For some reason I can't quite put my finger on, I don't expect this to happen any time soon. Which is one reason I remain skeptical that 'efficient pricing' has ever been a genuine goal.

fasteo 12y ago

metafraud, interesting concept

jliptzin 12y ago

This is probably going on right now in lots of other companies that have access to such data. We only hear about the ones that get caught. Seems like they didn't try too hard to cover their tracks. Just think about all the companies that have access to credit card data and all the people that are connected to those companies who could either be selling the data to others or trading on it themselves. Best thing to do to prevent this unfair advantage is releasing publicly available CC spend data.

trentnelson 12y ago
> Best thing to do to prevent this unfair advantage is releasing publicly available CC spend data. Who releases it? Every credit card company? At what frequency? What if one of the nightly bulk loads into the transaction data warehouse fails with an integrity error, alerts the DWH team, is picked up by a junior person because of a staffing anomaly, who forces it through, and then the next day's data release is off by a couple of million, but the automated trading bots and manual trading desks don't know this, so they trade on this new signal... ....I'm sure you see where I'm going with that.

wahsd 12y ago

Kind of highlights the true value of data that users are giving away with every single, in this case, transaction. I am not quite sure how one would go about an alternate method for assessing the actual value of user data, but it has always seemed rather obvious to me that it is hugely downplayed by all the self-interested parties and their defenders. Would it, in this case maybe be the change in market cap pre and post sales figures? But even that, as pointed out, has some increases baked in based on alternative research to estimate performance. I guess you would need to find a very specific company that really does not lend itself to outside, tangential research and that keeps its performance measures and metrics under wraps really well between announcements. Anyone have any idea of an industry or company that fits such a profile? Does anyone else realize we are really in and moving deeply into an era that is going to add significant opportunities for corruption and economic capture.

willis77 12y ago
The problem with ascribing dollar values to data (a.k.a. facts) is that you can make up a million untestable hypotheses about how data could theoretically have worth. To give an extreme but illustrative example: let's say that by typing this comment to you, I raise the temperature in my router by a millionth of a degree, which alters the wind pattern in my room, which causes butterfly to flap its wings, which... you get the point.. causes a hurricane in some remote part of the world. Does this make the "expected value" of my comment negative billions of dollars? You can back this argument out to less extreme versions and see that it's very difficult to economically value a fact. E.g. what if the traders named in this article had 100X the capital on the line for the same trade. Is the data now 100X more valuable because of the added economic value they derived from it? What if their trade netted them more than the change in market cap?
- Dylan16807 12y ago
  That's an interesting counterargument, but it defeats itself. Expected value is about averages.

savanaly 12y ago

Just from reading the title I knew this would be a Matt Levine piece. Great, entertaining finance columnist.

Nicholas_C 12y ago
I thought the same thing. He has very snarky titles. My favorite one is "Law Firm Accountants Were Bad at Accounting, Law."

jlev 12y ago

These guys should start their own credit card transaction aggregator (ala Mint), and gather user data that is expressly made available for market research. Make the analysis for privacy tradeoff more explicit and distribute profits.

snowwrestler 12y ago
Or, use the trading profits to subsidize the processing fees. A credit card processor that charges 0% fee on transactions would have a huge advantage when pitching retailers.
- seanp2k2 12y ago
  I like that idea way more than selling [aggregated, anonymized] consumer purchasing habit reports to advertisers, which is what I figure tons of payment processing companies are doing now (I have no source on this, but it seems obvious),
- will_brown 12y ago
  Damn...waiving transaction fees is probably valuable enough to merchants, they would freely contract the right for the processor to utilize the information for those purposes. However, that information would still be non-public and likely run afoul of insider trading. That said nothing prohibits companies from making this information public in real-time and maybe it makes sense for the SEC to require publicly traded companies to make this information public in real-time.
  - sokoloff 12y ago
    I imagine this might fall under the mosaic theory (that non-insiders are able to undertake original research to correlate a wide variety of individually non-material data to form an opinion about a security). As far as I know, such actions (by non-insiders) do not fall afoul of insider trading prohibitions. Otherwise, how would stock analysis work? Whether a card processor's handling of financial transaction flow would be viewed as non-insider is something that I don't know. I can make reasonable arguments either way.

ScottBurson 12y ago

I'm starting to agree with the editorial linked from the article [0] that laws against insider trading are pointless. People find ways to do it anyway, but because the laws exist, the general public thinks it's rare. It might be better for everyone to know what shark tank they're jumping into. [0] http://www.wsj.com/articles/SB10001424052702304279904579516170211639290 http://www.wsj.com/articles/SB100014240527023042799045795161...

savanaly 12y ago
I find myself agreeing too, but tentatively. What exactly is the argument for insider trading laws in the first place? In the absence of such laws would managers have the wrong incentives?
- cma 12y ago
  The money insiders make would otherwise go to other parties/counterparties when the news became public. Insiders charge a rent on everyone else. So do non-insiders doing above-board sales research, but they are subject to competition, keeping the rent/tax down. In addition to the rent, there is also a benefit provided in accurately pricing securities, but there is no law of economics saying this benefit will exactly cancel out the rent or anything of the sort. There are fundamental things (like limited number of sufficiently high-level insiders) restricting competition in conventional insider trading to minimize the rent charged from insider "research".
  - savanaly 12y ago
    Is it a transfer of income, or a genuine loss of resources? It seems like the losses to everyone else are offset one to one by the gains to the insider traders.
    - notahacker 12y ago
      It's not a zero-sum game if the effects are a disincentive to invest on the part of parties without strong connections to insiders.

Zarathust 12y ago

This reminds me of a quote by Eric Schmidt : "One day we had a conversation where we figured we could just try and predict the stock market..." Eric Schmidt continues, "and then we decided it was illegal. So we stopped doing that." They probably have thousands of employees who can access this information, I think it would be foolish to think that absolutely none of them does it for personal purposes.

rayiner 12y ago
The purpose of the law is precisely to make Eric Schmidt say what he did. In general, the law can't hope to prevent undesirable conduct, but only create social norms that prevent undesirable conduct at scale. Laws against murder won't stop jealous lovers from killing spouses, but do stop people from turning murder into a business. They won't stop casual drug use, but do stop Wal-Mart from getting into the meth business. Etc.
voidlogic 12y ago
So long as they used public information- why would it be illegal?
- secalex 12y ago
  I once had an interesting discussion with a tech-savvy criminal attorney about whether security researchers could trade public equities using early indicators of compromise or private knowledge of 0-day (gained from outside the company, not under NDA). She thought about it a bit and said "The insider trading laws are so broad that if the US Attorney didn't like it they would make it illegal, and if you had talked to anybody about it they would go down for conspiracy." My interactions with the criminal legal system as an expert witness since then have only reinforced my belief in Harry Silverglate's axiom that pretty much every US adult is merely an un-indicted Federal felon living their lives at the mercy of the thousands of AUSAs who could plunge them into a living hell.
  - olefoo 12y ago
    And that is a problem, that we should solve.

shawnee_ 12y ago

The implications are bigger than for public companies' insider trading. Think about the success of the Oatmeal's Exploding Kittens card game on Kickstarter. Aside from the fact that KS's new payment processor Stripe is leeching an astounding amount of money from this campaign (where most pledges have probably been made with cash-like debit cards being charged at the rate of credit cards), there are also implications of aggregation inside that cartel. How many playing card printing companies out there are eager to handle that order? What if you knew ahead of time who they were going to use, based on that "bank account" info you have to give out when you sign up for a campaign on KS? Private companies leverage this info all the time, and it's much easier for them to get away with it.

ChuckMcM 12y ago

It reminds me of how search engines know about things like shopping cart exploits right away because all of a sudden there are thousands and thousands of queries for a particular shopping cart software package being used on a web page. Personally I agree with Matt that this is a not the usual kind of thing. Clearly Chipotle could anonymize their sales with dummy purchases but the actual numbers would still be there. Like a search engine, for the data stream (credit card charges) to work you are forced to put enough information in the transaction to identify it. This is also something I see happening with IoT type technologies, when it becomes possible for someone to collect data on their own at thousands of locations for relatively small numbers of $, like the helicopters trying to estimate oil availability, you'll have data streams that can inform economic activity. Imagine something like a cellphone sized thing with a camera that just counts customers using OCV to note blobs at the counter, in a restaurant and texts a tally once an hour. Seems ridiculous but its quite possible to do, and much more cheaply than just repurposing disposed cell phones (although that works too).

patcon 12y ago

for better or for worse, the establishment of decentralized prediction markets will essentially make insider trading laws moot. Who cares if you can't bet on the original market when you have another unregulated market where you can bet on the veracity of the first? http://www.augur.net/#what-we-do http://www.augur.net/#what-we-do http://www.truthcoin.info/ http://www.truthcoin.info/

harryh 12y ago
Why would anyone who does not have access to insider information participate in an unregulated market when you have easy access to a regulated one?

ForHackernews 12y ago

Couldn't this kind of thing be easily solved by having companies release sales data more frequently? It seems like the only reason this is profitable is because earnings are released quarterly, so there's opportunity for the stocks to become wildly mis-priced over those months. What would the downside be for releasing earnings data daily, or even weekly or monthly?

ta33 12y ago
lol

aptimpropriety 12y ago

Have a look at 1010Data: https://www.1010data.com/solutions/by-industry/financial-services/ https://www.1010data.com/solutions/by-industry/financial-ser... and https://www.1010data.com/partners/detail/data-providers https://www.1010data.com/partners/detail/data-providers This stuff is already being done legally, with certain industries and within certain financial institutions. Just seems like these guys were just caught in an unfortunate legal snag - otherwise they just seem like good traders to me.

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DevX101 12y ago

How did these guys get caught?

unreal37 12y ago
Yes! That's the question! Was it that they were too successful trading, or was it their employer (or a co-worker) reporting on their side-business to the SEC.
nandemo 12y ago
Not sure about the US but this is more or less what happens in Japan: Brokerages are obligated to flag and report suspicious orders or trades to the [equivalent of] SEC. If necessary, the SEC then asks the brokerage for more information and investigates it. The definitions of "suspicious" can be somewhat arbitrary, but those >1000% returns would definitely be considered suspicious. Two people at the same workplace getting abnormally high returns would also be considered a red flag.

adrr 12y ago

Big question. If they setup a hedge fund and bought the data from the card issuer, and did the exact same thing. Would it be legal? Don't they use private satellites to take pictures of mall parking lots and crop fields to estimate holiday sales and crop yields? Hows is this different. Its data that public doesn't have access to.

thedufer 12y ago
You're describing a world in which said data is available on the market, which is already a drastically different world than the one we live in. I would be surprised if they can legally sell that data - surely credit cards come with a privacy clause?
- adrr 12y ago
  All the banks sell their data. Its aggregated but thats all you need. You don't care if a specific person went to Chipotle, you're looking for trends. http://www.businessinsider.com/credit-cards-sell-purchase-data-to-advertisers-2013-4 http://www.businessinsider.com/credit-cards-sell-purchase-da...
  - rwmurrayVT 12y ago
    I think this data is delayed. I don't care if there were 1.000.000 chipotle customers in Virginia two quarters ago.

joncp 12y ago

I see a lot of comments about how they could have figured out this data by just counting customers outside some Chipotle restaurants. This misses a key point: using their massive database, they were able to sift through thousands and thousands of businesses and actually figure out that Chipotle was one to watch. Without that data, they wouldn't know where to put their customer watcher. If they were a little savvier, they could have used their data from CapitalOne to decide which businesses to research and then create shill research, much like the FBI's "parallel construction" of evidence. I wonder whether that would have put them in the clear; when the SEC came knocking, they could have pulled out their research, saying "Look, we figured this out fair and square."

pbhjpbhj 12y ago
Wonder how closely footfall at high-street traders equates to their revenue - pretty close I'd imagine? I'm thinking whether a firm running city centre CCTV could do this with some computer vision systems. Mobile phone operators and ISPs that serve businesses must have similarly closely correlated signals to hand too.
- poikniok 12y ago
  What exactly does your first sentence mean? Trying to parse it and do not understand what "footfall at high-street traders" means.
  - deleted 12y ago
    [deleted]
  - mkehrt 12y ago
    "Foot traffic at high-end stores"
  - pbhjpbhj 12y ago
    as mkehrt says. >"Wonder how closely footfall at high-street traders equates to their revenue - pretty close I'd imagine?" To put it another way: I was thinking that the number of people who go in to shops in the high-street might correlate well with the revenue for those same shops.

unreal37 12y ago

I think they were primarily a victim of their massive success. If they had only made $500,000 instead of $2.8 million, they might still be going along fine. How did they get caught? Did the SEC see this account has 1,800% return on investment over 3 years and investigate who owned it? Or did Capital One discover some odd queries on their production database and report them to the SEC?

zaroth 12y ago
I think generally it's the large unhedged options position that makes 10x after an earnings surprise that gets noticed. To your point, yes I think in this case pigs got slaughtered.

raincom 12y ago

Workaday co-CEO Dave Duffield said in some interview that he invests privately in the companies that buys Workaday cloud hr solution. If he can sees how many employees are added to a certain company that buys Workaday cloud product, he can use that an edge.

downandout 12y ago

This is a stretch of insider trading laws, which I assume is why they haven't been charged criminally (the SEC can only pursue civil sanctions). The data was in the possession of their employer, not of the publicly traded companies. They could probably be prosecuted under the CFAA for misusing a protected computer system, but I cannot imagine them being convicted criminally for insider trading here, or even losing at trial if they choose to fight the civil SEC case. If I pay people to go count the number of customers in line at a representative sample of Chipotle restaurants during lunch every day, compare the results to the previous quarter where I was doing the same thing, and trade on that data, is that illegal? It's nonpublic information. Would my employees be prosecuted for this if they traded on it? Prosecutors and the SEC attempt to stretch our laws every day. It doesn't mean that they are going to win these cases.

jsprogrammer 12y ago
How is observing lines of Chipotle customers private information? Anyone can do it. Anyone CANNOT query Capital One's transaction databases, which is the entire problem here. Make the transaction databases public (Bitcoin does) and open the casino to everyone else.
- downandout 12y ago
  The point is that this wasn't private information, and it was not in a database that was the property of the target businesses. It didn't come from inside the company. Hence no "insider trading".
  - jsprogrammer 12y ago
    Can you link me to the database used?
RockyMcNuts 12y ago
What if Chipotle signed an agreement with Visa and their credit card processor saying that their data wouldn't be provided to traders to trade their stock on? What if Capital One signed an agreement with Visa saying that in exchange for issuing cards, they wouldn't provide the data to stock traders, and would keep it safe? What if they didn't trade on it, just sold the info to Taco Bell? Seems like a situations I want to avoid, if I'm Chipotle.

linuxhansl 12y ago

The point is not whether somebody does a lot of research or not. The point is whether he/she had data available that is not available to the public. That is simply not fair. Now, using helicopters to track oil tankers - as described in the article - seems to be a blurry line, but in theory anybody could do that and then use that information, it is available to everybody... In principle at least. This data was entirely private, so I would agree with being not fair. That said, I hope these guys do not have to go to jail, but are simply forced to pay their gains (or a portion of those) back, maybe as a fine.

kosei 12y ago

I've always felt this would be a really interesting job to have. The ability to look at a CC company's data and be able to generalize market trends. There are so many questions I'd want to ask about socioeconomic status and impact on debt, fraud, specific types of purchases, etc. It'll never happen, but someone should give a big data firm unfettered access to answer some interesting societal and behavioral questions.

clebio 12y ago

> That's amazing! These two like customer-support guys... > You sometimes see insider-trading cases where someone makes like a thousand-percent return... Am I the only one bothered by the author's writing? Am I getting old? Conversational is ok, I guess (though, Bloomberg?). But these "like"s? They're not 'like customer-support guys', they are customer-support guys (or else they are analysts). Bah-humbug.