Data Trends for Investment Professionals


The (Weak) Link Between Alternative Data and Inside Information

The alternative data business is an art and a science—in that order. The science—in the form of statistics—kicks in once our quant team gets its hands on a new dataset. There is of course plenty of creativity and innovation in this process: instincts honed from years as quants on Wall Street play a big role in guiding the research process. But the work is grounded in scientific discipline.

Before any data mining can begin at all, the mine itself has to be found. Finding data that can potentially yield alpha is very much an art. It involves a continuous conversation with our customers so we can understand the questions they need answered. Then the work starts: What company might have data that speaks to these questions? How can we connect to the right person at said company? How do we convince them—their masters, their lawyers and other stake-holding naysayers—to play ball with us? These questions don’t have answers. Time and time again, we find that soft skills and creativity open doors.

Earlier this month, Bradley Hope from the Wall Street Journal wrote an astute piece about this lust for data. He chatted with us and our friend Erik Haines over at Guidepoint about some of the challenges hiding beyond the quantitative aspects of alternative data.

The next day, Alexandra Scaggs at the Financial Times wrote what I thought was one of the more intelligent reflections on the subject. She expanded on controversial topics like data privacy, this time in the context of emails being parsed for consumer insights.

The week after that, the SEC stepped in.

I’m kidding—that didn’t happen. And for good reason. But what exactly does the SEC think about data that is not available to everyone?

The truth is, of course, that you are already being compensated for your data. Take, for example, the 100% discount you get on the cost of your Gmail account.


Back to Alex’s piece for a minute. She noted that, of the various entities who lust for your data, Wall Street’s intentions are actually some of the most benign. Advertisers exploit what they know of you to get you to buy their products. And if you’ve ever looked at your credit report, you would probably be shocked—as I was—to see just how much personally identifiable information is in there.

Hedge funds are harmless in the privacy realm because they couldn’t be less interested in you personally. All they care about is—surprise—money. What any one individual does or does not do is perfectly irrelevant. What one million people do, though, is very relevant. That’s because hedge funds care about the aggregate, not the individual.

To data platforms and their hedge fund customers, you are but one anonymous and expendable data point, ascribed worth and meaning solely by the big box stores that appear on your credit card statement.

That was Alex’s key point: “Targeted adverting and government surveillance are more invasive than the goals of the hedge funds.” Wall Street’s “lust for data”, as the Journal put it, is so innocuous she goes on to suggest “a system where people can sell their information to hedge funds themselves.”

This is a logical idea (look at CitizenMe), but it’s one that’s unlikely to work for the same reason hedge fund data mining is benign: the value of any one contributor is almost zero. If we had the total and complete spending habits of 5 million adults in the USA, we might generate $10 – $20 million in annual revenue from that information. Shared equally, that’s just a few dollars for each participant, and that’s unlikely to excite anyone. (The truth is, of course, that you are already being compensated for your data. Take for example the 100% discount you get on the cost of your Gmail account).

Brad Hope’s article in the Journal also caught the attention of former investment banker, lawyer and now columnist Matt Levine who pondered the SEC’s indifference to alternative data. In his words: “…proprietary data sources… make insider trading law seem a bit silly. (You can trade on that ad data, if the ad company sells it to you, but you can’t trade on similar data that an Apple executive sells to you.)”

Hedge funds are harmless in the privacy realm because they couldn’t be less interested in you personally. All they care about is—surprise—money.

But that’s exactly the point: alternative data is not inside data. It’s old-fashioned, third-party research that gives rise to useful insights. And there is nothing legally or morally questionable about that, even if such research yields results that would otherwise have only been available from Apple.

Regulating alternative data is like regulating the conclusions you’re allowed to draw from your own research. For example, if I put a sentry in a public space near every Apple store and counted everyone leaving with a new iPhone, should I be stopped by the SEC? Surely not.

What if I pay someone to count the trucks leaving Apple’s factories on public roads? Or what if I’m a big ISP and I monitor the growth rate in unique requests from iOS devices? All these scenarios lead to information that only Apple knows.

Alternative data is still the product of research—research imbued with serendipity. It offers conclusions about something that you happen to acquire while doing something else. If you’re Google in 2004, you might have thought you were running an email service. Fast forward 10 years, and you’re running a company that surveys consumer spending.

Fascinating, right?


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  • […] has said in the past: we’re already sharing our data every time we log in to Google. The advertising economy is based on this premise. Drones are […]

  • M says:

    I love your blog, thank you for sharing very interesting posts.

    On alternative data, I see things differently though. Privacy is not a big deal as you point out, but the big issue is fairness of access to information. The problem for me, is that highly valuable, predictive information is accessible only to deep pockets, which is in itself unfair to other market participants.

    Lets imagine these two cases:

    Google parses 100m emails and tracks the value of purchases on AMZN (shop and AWS) via recepts. Not everyone uses gmail, but enough people do to be representative, especially if you control for using the same sample. This gives you a very good estimate of revenues, but this information is not publicly accessible, lets say google knows it is valuable and asks for $1m for this quarterly info. The margin of error is probably around 1-5% max.

    A Finance department person at AMZN is offering to give the AMZN revenue figure in a range, with a maximum error of 5%. He is asking for $1m.

    The second is illegal, but how is the information different and the accessibility of it?
    I see no big difference between some alternative data and insider information.

    I agree that it would be very hard to regulate and to determine where the line is, between fair research and “privileged” information, I have not got an good answer for that. Perhaps accessibility of the information is one, but then again, you also need the skills to process this data, so just access would probably not be enough.

    • Vlad says:

      there’s nothing wrong with the more valuable data costing more to a point it’s only available to those with deep enough pockets. that’s capitalism and no less unfair than you being able to send kids to private school or not having to wait in line at the airport b/c you fly business. These “advantages” are available to others fairly if they can pay for them. Insider trading is illegal because the information is a) not available to everyone and b) the seller of the valuable information obtained it in a way that violates the rules of the game. it’s a difference between a good expensive private school with that prohibitive-to-many-parents tuition being justified by what the school offers (quality of premises, teachers etc) vs another good school where to get in you have to bribe the principal. he’s only bribable to those who know him really well (so not equitable access to this advantage) and he’s breaking the law selling something that doesn’t belong to him.

    • Tammer Kamel says:

      This is a great question. I have two thoughts. First of all, the whole point of research is to learn about a company and its performance. A lot of research is an exercise in figuring out things about a company that you could not otherwise know unless you had inside information. Every time an analyst estimates a company’s future cash flows they are using whatever information they can get their hands on. But in that case too, some inside information would help. My point is: almost all research is replicable by having someone on the inside feeding you information, but that doesn’t undermine the legitimacy of that research.

      My second point is cost: Good information has never been cheap. If you want a Bloomberg terminal for example, you will pay $25,000 per year. If you want ADP payroll data or the complete Michigan Consumer Confidence data in a timely manner, you will pay a lot. So again, alternative data is not really special in this way. Wall Street has always been a place where the price of information is proportional to its value.

      All that said, I think your question portends a dilemma the SEC will soon have to deal with.

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