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Comment by a13n | Hacker News Reader

It's pretty interesting that FAANG doing venture capital is basically like legal insider trading.

They clearly have data on web traffic, consumer usage, advertising spend, etc. that other VC firms and investors generally don't have access to.

They can use this to understand entire markets, see who the incumbents are, estimate revenue/users, see who's up-and-coming, etc. Obviously within some margin of error.

I wonder if this is how Facebook identified that Instagram was on the path to success, and knew $1B was a great deal. Meanwhile everyone at the time thought they were crazy for spending that much.

Since startups aren't publicly traded, I don't think insider trading laws apply to trading their securities. FAANG is legally allowed to use their access to information to make better investing decisions than other companies are able to. (IANAL)

It seems like they have a high chance of getting a great ROI. Once you're a big tech company, this is just another way of monetizing the vast troves of data you have.

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That's not really insider trading. Matt Levine pops up here all the time, and one of the really distilled mantras he has: inside trading isn't about fairness, it's about theft.

Like the people who track flights to speculate on M&A, or use satellite and aerial imagery to look at parking lots. Gathering information isn't a crime, in fact gathering and acting on that information is explicitly what you want at an aggregate level. What you don't want is entities stealing or misappropriating information that doesn't belong to them. I think all the mentioned data categories are basically Fb's line of business, so if it's usable it seems like its pretty fair game.

> track flights to speculate on M&A, or use satellite and aerial imagery to look at parking lots

This is very interesting, got any source or article? Thanks

edit: found this https://www.theatlantic.com/magazine/archive/2019/05/stock-v...

> Their big break came in mid-2010, when Neil Currie, then an analyst at the investment bank UBS, bought parking-lot counts for 100 representative Walmart stores and published the results in a quarterly earnings preview. The number of cars in the parking lots, he wrote, suggested that Walmart stock was undervalued.

> Currie’s prediction proved correct. As word spread that satellite images were a reliable predictor of corporate profits, a range of investment funds began buying retail-traffic data from RS Metrics.

Many cargo-culting orgs can use this as an example to learn "corelation != causation".

1. Buy shares of X; or bet a high-stake deal with X's board to up the stock price by N percent within a period T. 2. Run some offers/programs - which are intended at the theater - not real revenue. Instead of usual 200 cars a day, store might see 400 a day, sales numbers and volume remaining unchanged 3. Objective achieved; use propaganda marketing to sell the idea to others 4. This ups the stock price anyway - cuz data! 5. Collect bounty from X's board for making good on promise 6. Profit!

The theater might not be as simple as what's seen in this example, but this is exactly what startups in one way or other call "hustle" - and possibly the art of faking it till you make it.

Can't remember off top of my head but if I'm not mistaken, Muddy Waters Research did similar things with a listed Chinese company: went all the way to China just to fimd out that there's not much going on in those warehouses,while they were reporting record resuls.Shorted the stock,made tons of money.

Luckin coffee. Matt Levine wrote about it.

That is sort of the modus operandi for Muddy Waters, there are a few public cases like that. Given that parent talks about warehouses, it sounds to me more like the aluminum company China Zhongwang.

Here's an article about how they can look at how much oil exists via shadows cast from the sun.

https://www.wired.com/2015/03/orbital-insight/

But one argument for breaking up Amazon hinges on how they unfairly compete with their sellers by collecting data on what sells and what doesn't sell on Amazon and using that data to come up with their own in-house brands.

Is that different from what Facebook can do for their funded startups?

That is a different crime: anti-trust violation. That is when you use your dominant market position to harm consumers.

This is unrelated to insider trading.

And that exactly is the problem. The game is rigged in favor of folks who already have access to information (or can afford to buy it), not available to regular folks. That is how billionaires double their billions faster than me essentially playing lottery/roulette with my $1000 on Robinhood.

On the other hand, incorporating exotic or unusual sources of data makes the market more efficient for everyone. The market is first and foremost a method for price discovery and rewards actors for their contributions thereto.

It makes it beneficial to folks who can afford exotic and unusual data.

No, it benefits you too. By just holding an index fund you are freeloading on all of their work. You get efficient allocation while doing and paying virtually nothing.

I think people misunderstand how great and powerful index funds are for retail investors. Moreover, I people massively overhype this alternative data thing. Using alternative data to generate alpha is mindbogglingly difficult. If you just buy from a 3rd party firm, most likely all the alpha has been sucked up. So you need to source it yourself, clean it, analyze it, etc etc. It's really fucking difficult, and very expensive.

Trust me, you're not missing out. Your index fund is probably beating the returns of many firms with billions of dollars in capital and dozens of research analysts.

There is probably a useful fact that you know that billionaires don't. It is probably local or related to your technical expertise.

Peter Lynch famously researched companies by watching to see where his family spent pocket money. I recall reading analyses of trading performance by members of Congress -- they generally did about the same as everyone else except in companies associated with their districts.

Anecdotally, it is easier to double small dollars than large dollars. Berkshire Hathaway's growth has eased for ~2 major reasons: 1) Prices have been high for the last decade+, frustrating the core algorithm of value-investing. 2) It is very difficult to put huge amounts of money to work.

The alternative to a world with asymmetric information (and probably impossible to implement at that) is one with zero privacy, where all information is open to everyone always. I don't think we want to live in that world.

> There is probably a useful fact that you know that billionaires don't. It is probably local or related to your technical expertise.

Well, the people working for Billionaires should be able to figure that out right?

No, it’s not worth it for them to spend $50k in someone’s salary getting them up to speed on the local culture of a place to discover a trade that might be worth 150k.

If it’s not worth it tot hem it’s not worth it to us either then. The rules of ROI are the same for billionaire or for me.

A hedge fund needs to post good returns on the capital it has with the man power it has. They simply do not have enough resources to spend time on netting 100% returns on 50k investments. And they can't hire the problem away either, unless they pay each new employee less than 50k.

Yeah so it’s worth it for me if I pay myself less than 50k. So it’s not worth it.

You’re not getting the math. It’s absolutely worth it for you to spend 2 months of your time to find something worth $150k.

A hedge fund, investing team, whatever you want to call it, has a limited capacity. They need to beat market returns on pool of money so large that spending 2 months to find a 300% return on something with a max investment of $75k is absolutely an incorrect use of time.

Read about opportunity cost to understand why there are many things “worth it” to people without access to something better.

But totally worth it to create a “local” team that will find 10,000 such trades by using advanced aggregation and analysis techniques.

On the large scale, wealth reliably collects progressively higher percentages of return the higher the base capital.

The absolutely dismal performance of most hedge funds indicates otherwise. In fact, it's probably easier to generate alpha using small amounts of money. When you're managing billions and billions of dollars, you're severely constrained in the types of strategies you can actually run. This is why, for example, that RenTech's Medallion fund is capped at 10bn.

Just by investing in an index fund, retail investors are getting a pretty great investment, essentially freeloading off of all the hard work the active funds are doing.

How does that bode for the vision fund? Doomed from the start?

I would say that the vision fund was predicated on a audacious idea that was either pure genius or absolutely idiotic. The idea is as follows, instead of investing our huge pile of money into a bunch of different companies, which takes a lot of legwork, let's just fund a relatively small amount and give them a bunch of money. We will give them so much money that it's not possible for them to do anything except totally crush the competition and control the entire market.

The problem with the idea, and the eventual reason it didn't work, was that though it was largest VC fund ever, 100bn isn't actually that much in the scheme of things. There's so much money sloshing around the system looking for the place where it will be treated best. So, in essence, what Softbank ended up doing was bidding up the price of the entire industry, creating massive inflation. If Softbank gives a shi-tton of money , and another VC gives a shit-ton to a competitor, they've both just wasted a shit-ton of money.

I actually don't think Masa is the compete idiotic everyone makes him out to be. He has a very high tolerance for risk, but that doesn't make him irrational. The Vision Fund might not be doing that well, but Softbank's stock is looking pretty good at the moment.

He's the inventor of the danged electronic dictionary man.

I disagree with your assessment of the options

Simply outlawing extreme ownership of capital, via high taxes is a way to avoid privacy issues.

Unfortunately, we don’t seem keen to enable people to live their lives. We seem keen on making people ogle these giant initiatives and enterprises.

I don’t believe that’s natural. Growing up “off the grid” until the 90s, I’m still aghast at how sycophantic people act towards Amazon or a Gates like rich person.

Then I started seeing how forced social interaction is for upper middle class especially.

I should point out my family wasn’t poor. On the contrary, my parents just wanted to raise us outside the mainstream.

Don’t get me wrong I, love the gaudy culture. What I’m talking out against is demands to organize it just so. To normalize to the point of absurdity human agency to propping up of finance markets and banal old men’s gambling fetish, lavishing praise and riches on men as “owners” of the things we build collectively at scale is absurd to me.

There’s too much evidence out there suggesting success like that is luck not skill, and continued success like that is due to corruption of human social goals, not a lifetime of extremely good luck.

Continuing to play that social ladder game is hilariously morbid motivation to me.

Why not just have these men take their genitals out and prove who can take more whacks to the sack. That’s really what all this stuff feels like to me.

Lookit Bezos dashing back in to save Amazon. The idea is the place is winning!! Oops reality gets in the way and they stumbled with logistics hard.

Thanks to lavishing Amazon with praise in the form of billions, they’ll power on through it no problem. Tens of thousands of employees spared!

Meanwhile, thanks to the tax system literally millions of people are fucked.

But Facebook is publicly traded. If you truly think this is the case why not just put your $1000 in their shares and let it compound at the same rate as Zuck’s?

This is actually a good idea.

Some people don't want to support companies they don't believe in, regardless of potential profit involved.

i don't really agree with your point. better information leads to better price discovery for the 'game' at large for longs and shorts (including for unsophisticated robin hood investors). it isn't just about who can 'afford' to buy it; often times it's just about being smarter, or being willing to ask questions that nobody else is asking.

Fair point. But I feel we have missed OP’s point. Which is that these are not public trades.

If you truly believe this, buy Facebook stock

Indeed and have. But I have a feeling that the returns that fb would make on their VC investments will be much higher than investment in their stock. There would of course be trickle down effect.

Wouldn't it make sense for them to expand the VC arm until the ROI becomes the same as other departments?

The game isn't rigged because it isn't zero sum. Billionaires getting richer doesn't normally impact your ability to get richer. And as long as you're free to maneuver how you'd like, it shouldn't really matter to you that someone else is succeeding faster or slower.

Also, it's generally the case that there are more opportunities to turn $1 into $2 than to turn $1B into $2B.

> Billionaires getting richer doesn't normally impact your ability to get richer.

I believe this is not true for multiple reasons.

First - regulatory capture. Once a sector of economy generates a handful of billionaires, legal / regulatory barriers go up which make it much harder for startups to compete.

Second - competitive barriers. Google can acquire all the search channels (eg. paying Apple and Mozilla billions of $$$ to be the default search engine on iOS / Firefox).

Third - price undercutting by subsidizing a subset of the incumbent's product portfolio by profits from other parts of the business. See: Amazon vs diapers.com.

So yes, the game is definitely rigged in favor of billionaires.

> Gathering information isn't a crime, in fact gathering and acting on that information is explicitly what you want at an aggregate level. What you don't want is entities stealing or misappropriating information that doesn't belong to them. I think all the mentioned data categories are basically Fb's line of business, so if it's usable it seems like its pretty fair game.

This entire thread is getting so tangled up in what's presently legal and supportable under our exact, current implementation of capitalism that all of our brains have fallen out.

We don't need Facebook to have this much power! Why should they be allowed to keep this much capital untaxed? Why should they be allowed to own and operate Whatsapp, Instagram, Spotify, and Oculus, all as one huge entity?

A tangent, but how do you define "theft of information"? I suppose this circles back to the concept of IP, which I'm increasingly confident should be abolished in entirety.

> Since startups aren't publicly traded, I don't think insider trading laws apply to trading their securities. FAANG is legally allowed to use their access to information to make better investing decisions than other companies are able to

Insider trading laws apply to all companies, be them public or private. It is illegal to trade based on undisclosed material information the other party doesn't have - the law doesn't care whether the stock you're buying is private or on an exchange.

Here's an example: suppose you have a startup that's been going a long time, and some employees want to sell their stock on a secondary market. To avoid this, the startup offers to buy back employee stock, using the most recent valuation of the company to price it. However, the CEO knows that since that valuation was carried out the company is doing much better than expected - and the real value of the stock is much higher. This isn't disclosed to their employees.

This is classic insider trading, and the SEC has taken enforcement action against private companies for doing this sort of thing.

FWIW, I don't think Facebook actually has a large amount of material data in this case - a lot of what they possess (number of active users, platform engagement, etc) is already going to be known by the other party.

> It is illegal to trade based on undisclosed material information the other party doesn't have

Insider trading laws are designed to criminalize misuse of confidential information, they're not designed to create a fair playing field.

> FWIW, I don't think Facebook actually has a large amount of material data in this scenario - a lot of what they possess (number of active users, platform engagement, etc) is already going to be known by the other party.

Facebook knows how much money widget-makers are spending to promote widget product pages on Amazon.

That's not insider trading when the startup buys back stock and has more information than the employee has. It might be something else but it isn't insider trading. Now if the CEO was buying the stock rather the startup, that would be insider trading.

Insider trading is an individual crime.

https://www.investor.gov/introduction-investing/investing-ba...

So by your logic nobody can trade stock with me before buying me a WSJ subscription?

I don't think you understand what insider trading is. You can trade on information other people don't have all day long. In fact, that's what a good market is for. What you're not allowed to do is steal other people's information and use that to trade.

First off, the best deals in VC have no real data. Some big part of fund-making today (Vintage 2020) will happen at the seed and pre-seed stage with pro rata rights. So what good is all of Facebook's data about some app that may only exist as an idea right now. Like "disappearing photos" or "miming song lyrics on video."

Expect Google Ventures instead. If you're a Facebook / Google / Microsoft exec it is extremely lucrative to get shares in a company (sometimes as an advisor, sometimes as an investor) then acquire it through the giant company you work for. A lot of Microsoft execs were newly minted millionaires with the LinkedIn acquisition; a lot of Google execs had the same with Nest. Dell, HP, Oracle, VMWare... execs do this all the time.

Lemme give you a broader perspective on, "Company does thing with its money with complex economics and risks outside of its primary source of revenue." These giant companies all have charitable foundations. If you're a main line employee, you want to donate something, your company will match it, it uses an outside contractor to vet the charity, it doesn't do any of that stuff for YOUR main line employee charitable contribution.

You're an exec, you get 10-100x the donation matching benefit as the main line employee, and for some reason it's done through the foundation. Which goes to your family's charity. Run by your wife and kids.

A lot of this stuff boils down to, "executive compensation plans." It's everywhere! The Overstock CEO's ICO scheme was insane. Normal people just buy back stock you know? But it's gotta be creative, take people by surprise.

Some exec had to be motivated to do this and they're going to be motivated by their own personal money. No different than a VC. It doesn't mean that just because it's Facebook and not some VC firm they'll do any better. My expectation is they'll do a lot worse in both economic and accounting terms. The scheme will depend too much on Facebook being the acquirer in the long term so prices will be way inflated and insiders will be too incentivized to buy trash.

> They clearly have data on web traffic, consumer usage, advertising spend, etc. that other VC firms and investors generally don't have access to.

I mean, this wouldn't be insider trading since anyone can do their own legwork to get this information. Insider information would be things that aren't (yet) disclosed to the public, not things that can be ascertained through thorough research.

> Since startups aren't publicly traded, I don't think insider trading laws apply to trading their securities.

Yup. Insider trading laws are designed to prevent the public from being at a disadvantage. Private firms don't need to disclose anything publicly, they can choose their investors, etc...

Insider trading laws aren’t about fairness. They’re about the misappropriation of information. Knowing things others don’t and acting on it is fine. Acting on information that you have as a responsibility to someone else, or got from someone where that’s the case is not.

> anyone can do their own legwork to get this information

Can they though? My point is that FAANG companies are uniquely positioned by having access to this data that the public couldn't possibly have access to.

And hedge funds are uniquely positioned by having a bunch of economists and traders working for them.

The point is it's not considered insider information.

Just like how CDNs are uniquely positioned with traffic data (and payment processors have spend data), right? ;)

Exactly right. What do you think they're doing with that data - acting as social altruists? :-)

Having unique data and insights you develop is not a crime - indeed it's what you specifically want. Sourcing and acting on information from inside the company you're not authorized to have is.

> My point is that FAANG companies are uniquely positioned by having access to this data that the public couldn't possibly have access to.

People working to build unique skills and data is normal competition and building up a competitive advantage, not 'insider trading'.

Yeah, and Google has this with Google Analytics.

Is Google Analytics free out of the kindness of their heart? NO. It's free because you can spot up and coming winners.

Google Analytics is free because it is a complementary good to advertising spend. If the director of marketing tell the CEO "this $1000 campaign on Google drove $50,000 of sales at a 10% profit margin", the CEO is going to okay a lot more advertising spend. This winds up in Google's pockets.

The same logic applies to why Amazon develops open-source software that makes developing cloud applications easier.

It's no accident Facebook got a deal because they had great data; there is public documentation that Facebook acquried WhatsApp (and likely IG) using data tracking users from a VPN service they bought for much less: https://www.buzzfeednews.com/article/charliewarzel/why-faceb...

Others have mentioned that "insider trading" isn't the right terminology here. But more generally, I honestly don't think this is an issue from antitrust perspective. Imagine that instead Facebook granted exclusive access to all of that data to an external VC firm for a fee. IANAL but my impression is that relationship would be perfectly legal - just like similar arrangements between, e.g., hedge funds and satellite data companies.

Now, compare that to a retail store working with the store across the street to fix prices - very illegal, unless the same company owns both stores, in which case it's just called "price discrimination" or "good business". That type of instance - where the behavior would be illegal if it were coordinated between competing firms - is where antitrust concerns really come into play.

Of course, it gets murkier (and becomes a very obvious anti-trust issue) when it comes to acquisitions of competing firms like Instagram. I wouldn't be surprised at all if Facebook's goal here is to acquire stakes in potential competitors while they're still small enough to fly under antitrust authorities' radar.

As many others have pointed out, this isn't insider trading. To drive home the point of how much insider trading laws aren't about fairness, consider this:

It isn't insider trading for Facebook to use all the information it has about web trends to buy companies. However, if a Facebook employee used the non-public information Facebook has to go and buy stock in those same companies, that would be insider trading and be illegal.

I think you've pinpointed the exact problem.

Most employees don't own a significant enough stake in their company to benefit from trades made by the company acting on company data. But executives do, and they personally gain from trading on behalf of the company. Trades that would be illegal for any other employee to make.

I think what people mean is this isn't covered under the legal definitino of insider trading, but should be.

I remember reading an argument at the time, probably from Daring Fireball, that Zuckerberg has such a feeling for growth of social media by then, that he could see that Instagram was a great deal, also the same for WhatsApp.

Perhaps of interest/relevance: https://en.wikipedia.org/wiki/Onavo

Facebook will next give preferential treatments to startups it has stakes in through more access to data and users, while putting those who choose to not take Facebook's money at a disadvantage.

Gathering data != insider trading.

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