Sergey Brin, Google’s co-founder, once said the company should start a hedge fund because it had so much information. But Eric Schmidt, Google’s chief executive, reportedly responded, “Sergey, among your many ideas, this is the worst,” since the company would face serious legal problems in starting a hedge fund.
The difference is that they're only managing their own money. The implication of "running a hedge fund" is that you're managing outside investors' money. I imagine that with that comes an onerous set of regulations.
I asked this question when I worked at Google, and the answer was that our legal department thought it was a bad idea for two reasons.
Reason one is insider trading. The information Google has is aggregated from many sources, including insiders. If Google trades on that information they risk violating insider trading laws.
Reason two is privacy. The laws here vary a lot from country to country and Europe is generally the strictest. But the summary is that there are privacy laws which say it is okay to use some types of personal information as long as it is only used to improve a service being provided. Trading wouldn't fall into the category of allowable use.
Google handles email for many companies and even personal email accounts for people in a variety of jobs. Chance of some of that being insider information is pretty high IMO. Google also has a corporate search appliance that may be used in publicly traded companies too (I don't have a list of customers on hand).
Trading on non-public information is generally illegal in the US. Some of this may squeek by, but the majority of these suggestions (like Visa/Mastercard knowing actual sales numbers) would certainly be illegal.
You can't trade on insider information, i.e. information you've gained from a corporate insider who has a duty not to reveal it. If Steve Jobs tells you he has cancer, it's insider trading to short AAPL. If you pass Steve Jobs on the street and think "holy shit, that guy looks sick", you are free to short AAPL.
Companies do it all the time. They buy and sell their own stock, based on information that never makes it into a financial statement, for example.
Trading another company's stock based on secret information is also very much legal. Mark Cuban practically made a sport out of it with http://sharesluth.com
Now if there was major market collusion by industry giants to combine data and do horrible things, you're getting out of my knowledge range, but there's nothing generally illegal about trading on info nobody else knows about.
I believe the limitation on trading on secret information is limited to 'privileged' information, not 'secret'.
If you're entrusted with the information by the company (as an employee, officer, consultant, etc.), you are not allowed to use it.
If you discover it for whatever reason, and have no actual relation to the company, I don't think it counts - that's how Mark Cuban gets by with Share Sleuth.
That said, IANAL, so don't take that as legal advice :)
I haven't (yet) researched this topic very much, but if it is only legal to trade on public information, then how are all of the private investment banks on Wall St. legally allowed to develop astronomically sophisticated and proprietary, automated securities trading platforms using data from private commercial sources?
Proprietary trading does not necessarily involve insider information. "Insider" refers to those privy to exclusive data about a public corporation that have not been publicly released. Insider trading laws do not preclude trading on independently drawn ideas, and do not entail publicizing one's own reasons for deciding to invest, because those ideas do not originate within the company being considered for investment. An investment bank may trade away with whatever methods they have in-house, as long as they have not gained via information about the company that is not publicly available. “Private commercial sources” is vague, but if you mean paid databases like LexisNexis, Hoovers, or even 10kwizard, those just consolidate already public information in a more convenient formats. They don’t draw from insiders.
Of course, it's an open secret that insider trading is rampant in all major stock markets. You can’t police every pair of CEO golf buddies. I can’t provide a cite, but a study done a few years ago confirmed major movements shortly before (hours) major announcements with the vast majority of stocks in the Canadian exchanges. I’d expect the problem to be greater in the US markets.
What if you surveyed 100 Fortune 500 CIOs to figure out how much they're planning on spending with Oracle next year, and used that to trade Oracle stock? Is that illegal? It's certainly not coming from an Oracle "insider." That's what Google would be doing, but instead of 100 CIOs, they'd be aggregating data from millions of ordinary people.
One of the reasons CDC can't predict as quickly as Google can is because it takes weeks for data "from thousands of regional hospitals, etc." to get to CDC.
Not only that, but hospitals have to wait for confirmed laboratory test results before they report then to the CDC. That kind of reporting is certainly not done in real time.
At this point, I've seen far too many disruptive, innovative startups get acquired by Google, only to be quietly drowned into the abyss. Their game is keeping everything as directly linked to search as possible.
Is this pattern going to become one of Google's weakest links? Analogous to the way Microsoft ignored the web until it was too late, and that gave Google a foot in the door.
So the formula to overtaking Google is blindingly simple: change the game to make everything as unrelated to search as possible.
One could say Facebook is doing the exact same thing, but instead the mechanism hold a lock on is social, not search.
>the formula to overtaking Google is blindingly simple: change the game to make everything as unrelated to search as possible
Search is the act of finding info on which to verb. Facebook and Google Search are not strongly substitutable goods. To eliminate google and bypass web search, you are looking at integrating better information retrieval services directly into the operating system. Google has already predicted this though. Chrome OS will be already be out and have established market position by the time everyone else realizes they need to focus on this.
Eliminating the OS interface and the web browser interface binary distinction will be key.
Google is so far ahead of the game that they're dealing with robot cars, if we want to find a chink in the armor we need to think 5 steps ahead.
I do remember an article, probably more than 5 years old now (which explains why I'm having a hard time finding it), detailing how Microsoft managed its massive amount of money.
From what I remember, they were using proprietary systems (in the widest sense possible) to achieve significantly better return than average. I seem to recall that the industry average might have been 6% while they were hitting 10-11%.
I've gotten a tiny taste of what would be possible since soft-launching Newsley's search engine for financial news [1]. We're only getting 400-500 page views a day, but being able to see what people are researching and looking for in financial news has been quite interesting.
Today, for instance, we saw a surge of interest in people looking for news regarding "Geotech Boyles Bros" one of the companies involved in the Chilean mine rescue.[2]
I'm looking forward to seeing what other information people start researching. We're going to have to look at our privacy policy very closely. I really admire what Gabriel has done at DDG [3] and if we keep growing like we have been, we hope to do something similar. It's just the right thing to do.
Consider: A phone company has a legal obligation to keep conversations private. But suppose one didn't. If ATT started a hedge fund to leverage conversations they skimmed from all of their customers, ATT would not last long as a phone company.
Google has gotten as fair as it has by being seen as "fair dealer" regardless of its legal obligations. They're smart enough to want to continue that way.
Google can buy companies, much like Berkshire Hathaway, and does, so they don't really need to be a hedge fund for that purpose. If you think they want to trade securities and futures, they wouldn't need to be a hedge fund to do that either. A fund is a legal/tax structure and little else.
All the chatter in this thread about insider trading is a red herring. They could gather information, publish and trade on it without taking much legal risk. The reputation/headline risk is probably a bigger barrier. These types of barriers are set by fashion so it is conceivable that they might do it some day. It might not be a bad thing either, since our financial accounting system is such a poor way of disseminating information.
Legal issues aside (these can be resolved), if that's really true then Google's shareholders should consider replacing the board, as they are passing up a tremendous opportunity.
Not a direct response -- I wanted to reply to the parent which was just deleted.
It mentioned 'legal and ethical reasons'. An obvious legal problem would seem to be demonstrating the segregation of public data from private data under Google's management. Wouldn't they need to submit to some kind of external auditing to prove that only public data was being used for financial analysis? Not going to happen.
I don't think there's a real ethical problem so much as a PR risk of the kind that Google already has to deal with: people are suspicious that their private Google-hosted data is being scrutinised for dubious reasons.
I think there is too much risk with a traditional hedge fund model so Goog is going the route of seed-investor, angel investor, VC - bigger risks, bigger rewards ... less muddying of the legal waters (potentially).
Google does have a banking license in The Netherlands, I was looking into this yesterday, but there is not much information available, I guess they are not using it. I still wonder why they got it though.
http://www.fool.com/investing/general/2010/06/07/google-the-...
Also:
Sergey Brin, Google’s co-founder, once said the company should start a hedge fund because it had so much information. But Eric Schmidt, Google’s chief executive, reportedly responded, “Sergey, among your many ideas, this is the worst,” since the company would face serious legal problems in starting a hedge fund.
http://dealbook.blogs.nytimes.com/2010/03/22/google-is-now-s...