We all know the basics of how Wall Street functions, or at least we think that we know. The perception that we have is of bankers in expensive suits with brown briefcases visiting various offices and towering up on boardroom members of some company and making them do something that earns them a heck of a lot of money. This perception is kind of accurate, but the thing is, is that this style of business is outdated. Wall Street’s hedge funds and private equity houses play a different ballgame altogether, which is based on using space as the basis of their trades.
So, what do I mean by using space as the basis of their trades? By space, I mean satellites that are put in place for a variety of reasons: Tracking flight patterns, finding tremors under the earth’s surface, shipping routes and a variety of other stuff. The data from these satellites; satellite feeds per se, is easily accessed, and is used as the basis of the trades that will earn hedge funds hundreds of millions of dollars.
So, how does this work? It’s simple: You use the data from the satellites to take a look at what is happening anywhere in the world (provided you know the places you aren’t supposed to look) and use the information from there to make your predictions based on compatible algorithms that have been developed for exactly this purpose.
This looks kind of wobbly, especially where it is used as the basis of decision making for trades that have hundreds of millions of dollars placed on them. This concept has been portrayed the best with the example of Walmart, the biggest retail company in the world. The saying is that “everyone knows how big of a quarter Walmart is going to have based on the number of cars in its parking lots.”
The use of satellite data and imagery has proved to be critical in many cases, especially when international investments, acquisitions and takeovers are concerned. If one is smart enough, they can figure out the production levels of a certain company based on the number of trucks and workers entering and leaving the company’s factories during a particular year, or use satellites to track flight patterns to determine which big deal is about to happen, which allows them to get in early on the game, which is sometimes way ahead of the curve.
If you need an example as to how this thing works, you need not look further from Ben Kim and Bobby Axelrod (yes, I am about to quote a scene from Billions, because why not?)
Ben Kim is an analyst working at Axe Capital, Bobby Axelrod’s hedge fund. In a meeting, he discloses how he has been developing relations with the owners of local car rental companies in Milwaukee. He further goes onto say that there has been a surge in the amount of Dutch passports that are being provided for ID in order to rent cars, and that on the basis of satellite data and imaging, these cars have been going from a hotel to Beer National’s Milwaukee headquarters. Based on all of this info, it is safe to assume that a joint venture is in the books, if not an outright purchase, and has allowed Axe Capital to place long positions on the stocks of both of those companies, and will earn them a profit in the range of a hundred million dollars.
This example is the most classic case for the usage of satellite data to aide in investing decisions. What makes this example even more authentic is that the merger between Ab Inbev and SAB Miller, two of the world’s largest brewing companies. However, it is obvious that getting access to information like the nationality of passports used for car rentals is a bit slim, yet this scene’s authenticity relies on the usage of satellite data to confirm what is what.
If you all need an actual real life example, here’s one. In 2010, Neil Currie, a banker from UBS, purchased the services of a company called RS Metrics, that tracked the number of cars located in the parking lots of companies like McDonalds and Home Depot. However, Currie was after the cars in Walmart’s parking lots, and then published the results in the quarterly performance report stating that the company’s stock was undervalued. This allowed companies to realise that satellite data is a key metric of determining investments if you want to be ahead of the curve.
This data from satellites that allows investors to determine their investments is part of what is called as ‘alternate data’. Alternate Data refers to the information that can be retrieved from places like consumer spending records, mobile phones, satellite imaging and public records, to name a few, that allows hedge funds and private equity groups to determine where the next big thing is going to happen. This data is available within the public domain, but is not accessible by all. However, this does not allow it to be categorized as market non public information, and therefore, is under the legal bounds of providing the stance behind a particular investment strategy.
The use of alternative data has allowed companies around the world to become sharper when it comes to investing, and has allowed for the development of a new class of “smart” within the market. And since the use of alternative data in making investment decisions has become widespread, it has now reduced the efficiency, because it doesn’t matter who is first, but who is right.
There has been some debate over the use of said data to make investment decisions. One of the arguments is that the data is not accessible by all, and institutions have to pay top dollar to find the relevant data from companies that specifically focus on the retrieval of data collected by satellites and their subsequent sale. Some state that this data is unethical, i.e. it is collected from the wrong sources like cellphones, which means breaking the privacy of people. Other arguments say that the use of satellites is against the geopolitical interests of countries, and that any investment that is based on a country’s downfall is against foreign policy.
All of these arguments do essentially hold merit, but what they fail to comprehend is that all of this data is available within the public domain, and available for those who can access it. And since the definition of insider trading is mainly focused on the conditions of people either being an insider, or on the illegal retrieval of information, satellite data goes away scot free.
Ultimately, the use of satellite data and other sources of alternate data have for sure allowed hedge funds and other financial institutions to place their bets and make a fortune on them. However, Wall Street will keep coming up with new ways to make money, and this was one of those that allowed it to do so. So, does this mean that it was borderline legal? Maybe. But does it also mean that this was something that no one had ever thought of before? Definitely, because everything is allowed as long as you’re making a buck on Wall Street.