10 ms·

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

by 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.
- tptacek 12y ago
  It's not very clearly insider trading, because the traders had no fiduciary duty to Chipotle. It's arguably insider trading because their relationship to Chipotle is colored by the relationship payment processors have to Chipotle. And that argument will probably prevail. The point of Levine's post is that for the markets to work, there have to be traders trading at an advantage. The point of insider trading laws isn't to level the playing field --- that's exactly what you don't want. It's to eliminate a class of agency problems. We can (probably should) want to deter credit card companies from trading on data mining payment data without believing that insider trading laws are the right vehicle to do that with. Privacy regulations and mandatory confidentiality agreements could set up an effective civil deterrent, rather than sporadic and incoherent SEC and criminal investigations.
  - snowwrestler 12y ago
    But don't insider trading rules apply even to people with no real agency power? A secretary who overhears that a drug trial failed is not in a position to affect how the company reacts to that information, and probably does not have enough capital to move the stock. But she would still be violating insider trading laws if she sold all her stock before the press release was issued. I can see why professional traders and speculators might not want to level the playing field, but I don't see why long-term investors would feel that way. When I invest in stocks, I intend to hold for a long time. I'm betting on the business success of that company or group of companies, not on inequalities in the availability of information about them.
    - tptacek 12y ago
      It's not in the interests of long-term investors to keep advantaged traders out of the market. The alternative to the participation of informed investors is mispricing. Fundamentals investors want prices to reflect actual value, too.
mikeash 12y ago
I think (and I'm not terribly informed here) that the difference would be that Capital One has a business relationship with Chipotle, albeit somewhat indirect. Polling customers while otherwise being unrelated to the company is different from mediating payments to the company and using that data. According to the article, the big problem here was that the data being used here belonged to Capital One, and these researchers were running their own thing on the side using that data.
nhstanley 12y ago
Well, in the article the make clear that there is case law that this is illegal and considered "misappropriation" insider trading.[1] Even if we decide it isn't insider trading, Capital One is on the hook for what it's employees do. Chipotle or whoever could sue CapOne for breach of contract, and CapOne could sue these guys for that. So even if we decide as a society it's not criminal, another group of guys doing the same thing somewhere else might not get to keep all that sweet dough they made purely on civil grounds. I don't know. It's interesting. [1] https://supreme.justia.com/cases/federal/us/521/642/case.html https://supreme.justia.com/cases/federal/us/521/642/case.htm...
- discardorama 12y ago
  > Well, in the article the make clear that there is case law that this is illegal and considered "misappropriation" insider trading. I'm not sure that is the exact same thing. These guys had to do some research. Consider, for example, a large pork supplier. If they see orders from Chipotle trend up by (say) 30% over a quarter, are they free to buy call options on CMG? What if you're a feed supplier to this pork supplier, and you know that Chipotle is their biggest customer, and see that this pork supplier's demand for feed has gone up by 30%; can you then buy call options? This is a gray area, and I'm not sure the line is really that clear cut.
  - will_brown 12y ago
    >This is a gray area, and I'm not sure the line is really that clear cut. Your examples are not novel issues, certainly there would be case law on point. I can not cite the case law, but I would tend to believe your examples fall within the classification of insider trading (i.e. trading based on a companies non-public information). I know for example as an attorney if I am working on a merger and I buy/sell stock or inform someone else who buys/sells the stock that would be insider trading. Generally, think of the Martha Stewart allegations, she was informed by a friend/corporate officer that the FDA was rejecting the companies cancer drug. Based on that non-public information her brother sold the stock and then the FDA decision became public and the stock dropped. It is a stretch from your hypothetical, but the non-public information paradigm would seemingly still apply.
wahsd 12y ago
At the very least it is misuse of Company resources. They can probably sue these goons for every single dollar they made and then some, especially if they are found guilty, which they probably will be. Even at that, you have, what is essentially insider information on the raw sales data of a company that way since you are essentially seeing the same information that the company itself sees, but just a rather linear proportion of it.If you have the Capital One portion of Chipotle sales, and you know the electronic transaction market share of Capital One cards, and you know the proportion of cash to electronic transactions; I would not be surprised one bit if you could essentially predict the sales figures down to within 1% margin.
iolothebard 12y ago
This is clearly insider trading. It's non public info. I had tons of non public info as an auditor for Arthur Andersen. No way in hell I would have traded on any of that information. Job > Jail.
- tptacek 12y ago
  "This is clearly insider trading. It's non public info." is broken logic. You are allowed to trade on non-public information; in fact, for the markets to work effectively, you want people to do exactly that.
  - iolothebard 12y ago
    Your ignorance is comical. Thanks for trying. Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information. From: http://www.sec.gov/answers/insider.htm http://www.sec.gov/answers/insider.htm
    - tptacek 12y ago
      You got downvoted because you appear to have either missed the words in breach of a fiduciary duty or other relationship of trust and confidence in your own quote, or responded under the misconception that I'm arguing that the Capital One guys should be allowed to do what they did.
      - iolothebard 12y ago
        Well the SEC agrees, so I'll go ahead and trust them and my years of training. Trading on any insider non-public info is actionable by the SEC. Keep your eye on this one, should be fun for those involved. I sure as hell wouldn't risk it.
- 12y ago

by antr 12y ago

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.

tptacek 12y ago
It's not very clearly insider trading, because the traders had no fiduciary duty to Chipotle. It's arguably insider trading because their relationship to Chipotle is colored by the relationship payment processors have to Chipotle. And that argument will probably prevail. The point of Levine's post is that for the markets to work, there have to be traders trading at an advantage. The point of insider trading laws isn't to level the playing field --- that's exactly what you don't want. It's to eliminate a class of agency problems. We can (probably should) want to deter credit card companies from trading on data mining payment data without believing that insider trading laws are the right vehicle to do that with. Privacy regulations and mandatory confidentiality agreements could set up an effective civil deterrent, rather than sporadic and incoherent SEC and criminal investigations.
- snowwrestler 12y ago
  But don't insider trading rules apply even to people with no real agency power? A secretary who overhears that a drug trial failed is not in a position to affect how the company reacts to that information, and probably does not have enough capital to move the stock. But she would still be violating insider trading laws if she sold all her stock before the press release was issued. I can see why professional traders and speculators might not want to level the playing field, but I don't see why long-term investors would feel that way. When I invest in stocks, I intend to hold for a long time. I'm betting on the business success of that company or group of companies, not on inequalities in the availability of information about them.
  - tptacek 12y ago
    It's not in the interests of long-term investors to keep advantaged traders out of the market. The alternative to the participation of informed investors is mispricing. Fundamentals investors want prices to reflect actual value, too.

mikeash 12y ago

I think (and I'm not terribly informed here) that the difference would be that Capital One has a business relationship with Chipotle, albeit somewhat indirect. Polling customers while otherwise being unrelated to the company is different from mediating payments to the company and using that data. According to the article, the big problem here was that the data being used here belonged to Capital One, and these researchers were running their own thing on the side using that data.

nhstanley 12y ago

Well, in the article the make clear that there is case law that this is illegal and considered "misappropriation" insider trading.[1] Even if we decide it isn't insider trading, Capital One is on the hook for what it's employees do. Chipotle or whoever could sue CapOne for breach of contract, and CapOne could sue these guys for that. So even if we decide as a society it's not criminal, another group of guys doing the same thing somewhere else might not get to keep all that sweet dough they made purely on civil grounds. I don't know. It's interesting. [1] https://supreme.justia.com/cases/federal/us/521/642/case.html https://supreme.justia.com/cases/federal/us/521/642/case.htm...

discardorama 12y ago
> Well, in the article the make clear that there is case law that this is illegal and considered "misappropriation" insider trading. I'm not sure that is the exact same thing. These guys had to do some research. Consider, for example, a large pork supplier. If they see orders from Chipotle trend up by (say) 30% over a quarter, are they free to buy call options on CMG? What if you're a feed supplier to this pork supplier, and you know that Chipotle is their biggest customer, and see that this pork supplier's demand for feed has gone up by 30%; can you then buy call options? This is a gray area, and I'm not sure the line is really that clear cut.
- will_brown 12y ago
  >This is a gray area, and I'm not sure the line is really that clear cut. Your examples are not novel issues, certainly there would be case law on point. I can not cite the case law, but I would tend to believe your examples fall within the classification of insider trading (i.e. trading based on a companies non-public information). I know for example as an attorney if I am working on a merger and I buy/sell stock or inform someone else who buys/sells the stock that would be insider trading. Generally, think of the Martha Stewart allegations, she was informed by a friend/corporate officer that the FDA was rejecting the companies cancer drug. Based on that non-public information her brother sold the stock and then the FDA decision became public and the stock dropped. It is a stretch from your hypothetical, but the non-public information paradigm would seemingly still apply.

wahsd 12y ago

At the very least it is misuse of Company resources. They can probably sue these goons for every single dollar they made and then some, especially if they are found guilty, which they probably will be. Even at that, you have, what is essentially insider information on the raw sales data of a company that way since you are essentially seeing the same information that the company itself sees, but just a rather linear proportion of it.If you have the Capital One portion of Chipotle sales, and you know the electronic transaction market share of Capital One cards, and you know the proportion of cash to electronic transactions; I would not be surprised one bit if you could essentially predict the sales figures down to within 1% margin.

iolothebard 12y ago

This is clearly insider trading. It's non public info. I had tons of non public info as an auditor for Arthur Andersen. No way in hell I would have traded on any of that information. Job > Jail.

tptacek 12y ago
"This is clearly insider trading. It's non public info." is broken logic. You are allowed to trade on non-public information; in fact, for the markets to work effectively, you want people to do exactly that.
- iolothebard 12y ago
  Your ignorance is comical. Thanks for trying. Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information. From: http://www.sec.gov/answers/insider.htm http://www.sec.gov/answers/insider.htm
  - tptacek 12y ago
    You got downvoted because you appear to have either missed the words in breach of a fiduciary duty or other relationship of trust and confidence in your own quote, or responded under the misconception that I'm arguing that the Capital One guys should be allowed to do what they did.
    - iolothebard 12y ago
      Well the SEC agrees, so I'll go ahead and trust them and my years of training. Trading on any insider non-public info is actionable by the SEC. Keep your eye on this one, should be fun for those involved. I sure as hell wouldn't risk it.
12y ago