Technology Enables Insider Trading?

[Arthur Hanson]

Technology has changed so many rules in every facet of society and the world, laws and regulations have failed to keep up or even comprehend the changes every facet of almost everything we touch or come in contact with personally, professionally and financially that technology has wrought. Satellite imagery, business big data and social media data all play a part in not only business strategy, but the financial strategy of not only the businesses, but the public markets. Paying for satellite imagery from everything from freight yards, ports, parking lots, commercial structures and having the resources to comb through it, many times using AI or ML give a huge advantage not available to the general public. Combine this with paid access to social media and search engines data bases and you have a huge edge that is out of reach to the vast majority of public players in the market and even some of the small to medium players in these markets.

There would be no problem with this if the data was posted publicly before being used, but obviously this is not happening and has allowed some groups to literally reap billions of dollars in excess profit they normally wouldn't have been able to accumulate if the information had been made public first. A number of technologies powered by a foundation built on semis have created a situation where the laws and regulations are falling farther and farther behind due to "Great Acceleration" that is changing literally everything at an ever increasing rate and creating a world in which no one can keep up or even comprehend what is going to happen. This has created ever more creative ways of doing everything that only a smaller and smaller percentage of people and organizations can either use or abuse the world we live in. Now is the time to start to set a migration path that lets these new technologies benefit and educate as many people as possible for only an intelligent population can make intelligent decisions. In this way not only do we create far more benefits, but also make better relationships, personal, professional and political in which as many as possible will get the greatest benefit. Massive inequality benefits no one, not even the people on top. Helping everyone reach their maximum potential yields the greatest benefits for all. Technology and responsibility go together.

Data on a scale once considered science fiction combined with AI/ML is literally changing all the rules and customs we live by and moves at a pace that is not only getting faster, but the rate of change is accelerating dramatically with the great "Great Acceleration". The "Great Acceleration" is now the greatest force for change, good or bad, and at this point in time is literally out of control with consequences yet to be imagined. Left to random chance, their is no telling what the implications will be, except they will be staggering in size and impact at with constantly accelerating change as we are already seeing.

Addition: What was once considered inside information can now be gathered using technology in many ways the average investor or even many professionals don't have access to. In other words, like many industries and pursuits, technology has totally changed the game and the financial structures ecosystem is being totally disrupted across the board.
Comments, additions and thoughts solicited and welcome.

 

[john32979]

The scenarios you painted are not insider trading. They're just good research. Asymmetry of information whether it be speed, breadth or depth has always been with us. As a market practitioner, I would argue that because of technology the average retail investor has more information at his/her finger tips than ever before and that the playing field is more level than ever.

Insider trading is defined as trading on confidential information e.g. getting a tip from insiders. Though the regulators don't really give us a clear cut litmus test, counting the number of customers parked in public spaces via eyeballs or satellite is just good research.

 

[ChrisGar]

Different topic. I remember reading a few years about monitoring stock trading traffic to beat the system. They would watch for trades in real-time ... and know a few milliseconds ahead of time of upcoming trades. (from what I remember, the trades were coming from outside of NY City ... and trade was closed within NY City.) Then they would beat the trade to the NYC exchange ... and make a few pennies on each trade. They "beat the system" by knowing of upcoming trades -- and beating them to the market by a few milliseconds.

If you are interested in how this was done, read the book "Flash Boys: Cracking the Monkey Code" by Michael Lewis.

 

[john32979]

Monitoring trading traffic via routers before orders hit the exchange is not really possible since brokers and exchanges secure their pipes pretty well. They're also typically linked via direct point-to-point private connections. If an exchange or broker is caught selling information before it hits the matching engine, no one would ever trade with them again. If any telco is caught selling confidential trading data, they'd be fined and sued out of existence. However, once the data leaves the exchange matching engine and anonymized, it's a free-for-all. Public data that leaves the exchange is "market data" and folks have come up with rather creative architectures to process and transport that data as quickly as possible to take advantage of arbitrage situations i.e. someone wants to buy at a higher price at one place than someone offering to sell at another. It's all perfectly legal and has been around since the invention of trade. It's no different than buying silk from China, hauling it across Asia and selling it in Rome for a handsome sum. Obviously modern markets are far more efficient and profit margins are no where near what it used to be.

 

[john32979]

If you are interested in how this was done, read the book "Flash Boys: Cracking the Monkey Code" by Michael Lewis.

Michael Lewis' research for that book was rather amateurish -- perhaps purposely done that way so it can fit his pre-conceived narrative. Most of the alarms he raised were basically non-issues and his accusation about rampant front running was highly inaccurate and incorrect. The book demonstrated that he did not understand how modern markets work. Flash Boys made me question the quality of his research for all of his previous books.