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If he had shorted a correlated stock or bought a competitor stock would it have been: 1) completely legal or much less illegal? 2) just as illegal and just as

If he had shorted a correlated stock or bought a competitor stock would it have been: 1) completely legal or much less illegal? 2) just as illegal and just as likely to get caught? 3) just as illegal but less likely to get caught? I guess the question in general is: does insider trading apply to your company only, or the entire industry / stock market?

brisance 8y ago
It's hard to prove a link that someone knows something about a competitor's company and thus counting on the stock to tank. However, depending on the prosecution they may charge the miscreant with other crimes e.g. possession of trade secrets. FWIW the CIO of Equifax found out about the Equifax breach obliquely and was charged with insider trading while the CEO made sone suspicious trades before the press release and was not charged. https://money.cnn.com/2018/03/14/news/companies/equifax-insider-trading/index.html https://money.cnn.com/2018/03/14/news/companies/equifax-insi... As for your last point, I think that's the role of the market speculators and usually the SEC or other enforcement agencies do not take an active role in policing these actions unless there is compelling evidence that a crime has been committed.
- jessaustin 8y ago
  Any executive team is a conspiracy against the trading public (among other parties), and insider trading laws are used to punish defectors from that conspiracy. Thus these laws harm the trading public and the economy as a whole. By definition, a CEO isn't a defector, since she's running the conspiracy. Jr. VPs like a CIO, though, should definitely be careful when attempting to profit from nonpublic knowledge.
arawde 8y ago
I'm going to take a stab at answering this, but I am not an expert. Insider trading applies to instances where you have _material, non-public_ information about a company. The criteria of what makes information material and non-public are a little bit of a gray area, but I'm going to just use it to mean "I know something about a company because I am in a position to be trusted by that company" In other words, your example wouldn't be insider trading. You have no material, non-public information about correlated stocks or a competitors stock. You have a hunch that that stock will perform in a way related to the stock you have information on. AFAIK, theres nothing stopping you from acting on that hunch. So of the 3 options presented, its probably a mixture between 1 and 3, leaning towards 1.
- ghaff 8y ago
  Let me give you a scenario. For simplicity's sake, I'm a senior exec of a company in an industry dominated by two companies: $ME and $THEM. My company is about to release a rotten earnings report because $THEM is eating our lunch. While you're probably less likely to be caught and prosecuted, you're still trading on inside information if you buy a bunch of $THEM stock immediately in advance of your rotten earnings release.
  - arawde 8y ago
    I think this is true. I would have to look to find a case where this was what happened, but I would be surprised if such a case did not already exist. I think this situation is much more difficult to find and enforce, however. As an executive, you have to file with the SEC for share purchases (I believe its either a certain number of shares or a certain $ amount bought/sold. I also believe the form is form 4) So it becomes a matter of figuring out when the senior exec knew the information and traded on it, and I think its a bit more difficult to enforce because its not your typical insider case. I like your example, because it really hits at the edges of what is material non-public information. Something that just occurred to me: if you are a senior exec, your compensation is probably tied to share ownership in $ME. Even if you trade on $THEM, and make money, you're probably going to take a pretty substantial hit on your own $ME holdings. This isn't to say its any less fraudulent/misleading, but its an interesting thing to consider. I wish I had a better answer to this scenario.
- perl4ever 8y ago
  Suppose you have done proprietary analysis on satellite imagery to estimate sales of a company. Since you have no relationship with the company, you aren't betraying any relationship of trust. I don't think* this is insider trading, to trade on the estimates you produced. However, the information is not public and nobody else has it. So I think a layperson might well regard it as unfair and expect it to be illegal. *This is not legal advice
  - arawde 8y ago
    It may seem unfair, but I think the reason I would give as to why it isn't is: you have to pay for that source of data. Using satellite imagery to analyze sales, imho, sort of falls into the same area where HFTs pay for feeds from exchanges so they can take advantages of widening gaps in bid/ask spreads. When it comes to insider trading, it really seems to boil down to: did I obtain the information in a way where no outsider would have possibly done so? With your example, it certainly seems possible that other groups could perform the same analysis. So as you said, it wouldn't be insider trading. I think another one of the aspects of insider trading is _certainty_. If you're an insider, and you know your company is going to miss earnings, the likelihood of you making a wrong bet are near 0. If you're analyzing imagery of parking lots to see if sales at Wal-Mart are going up, theres still a non-insignificant chance that you could bet wrong. Maybe the reason theres so many cars it that they are running promotions that actually don't increase revenues in an expected way. Maybe there aren't any cars because people are taking public transit. When you're an outsider, theres way more variables that go into your trade, compared to when you're an insider and its a simple question of "how will this information about my company get reacted to?" Insider trading is probably one of the most interesting aspects of modern finance. As you can probably tell, I take most of my information from Matt Levine (he gets linked here pretty often, but his column is Money Stuff on Bloomberg (also an email newsletter so you don't use up your free articles)) Again, not an expert, take everything I say with a healthy pinch of salt.
ghaff 8y ago
Not an expert but probably #3. It's trading based on non-public information. You don't mention but is certainly just as illegal is passing on stock tips either unilaterally to friends and family, based on an arrangement to split profits, or otherwise profit indirectly. Obviously the more obfuscated (and smaller dollar) insider training is, the more difficult it is to detect.
- perl4ever 8y ago
  "It's trading based on non-public information." I don't think this can be an accurate characterization. Any time you buy or sell a stock, you should have non-public information in some sense - since the current price theoretically reflects all the public information. Matt Levine has written some stuff from time to time about popular misunderstanding of insider trading law in the US. One point he makes is that it's outlawed in a kind of indirect way, rather than being based on a layman's idea of fairness.

brisance 8y ago

It's hard to prove a link that someone knows something about a competitor's company and thus counting on the stock to tank. However, depending on the prosecution they may charge the miscreant with other crimes e.g. possession of trade secrets. FWIW the CIO of Equifax found out about the Equifax breach obliquely and was charged with insider trading while the CEO made sone suspicious trades before the press release and was not charged. https://money.cnn.com/2018/03/14/news/companies/equifax-insider-trading/index.html https://money.cnn.com/2018/03/14/news/companies/equifax-insi... As for your last point, I think that's the role of the market speculators and usually the SEC or other enforcement agencies do not take an active role in policing these actions unless there is compelling evidence that a crime has been committed.

jessaustin 8y ago
Any executive team is a conspiracy against the trading public (among other parties), and insider trading laws are used to punish defectors from that conspiracy. Thus these laws harm the trading public and the economy as a whole. By definition, a CEO isn't a defector, since she's running the conspiracy. Jr. VPs like a CIO, though, should definitely be careful when attempting to profit from nonpublic knowledge.

arawde 8y ago

I'm going to take a stab at answering this, but I am not an expert. Insider trading applies to instances where you have _material, non-public_ information about a company. The criteria of what makes information material and non-public are a little bit of a gray area, but I'm going to just use it to mean "I know something about a company because I am in a position to be trusted by that company" In other words, your example wouldn't be insider trading. You have no material, non-public information about correlated stocks or a competitors stock. You have a hunch that that stock will perform in a way related to the stock you have information on. AFAIK, theres nothing stopping you from acting on that hunch. So of the 3 options presented, its probably a mixture between 1 and 3, leaning towards 1.

ghaff 8y ago
Let me give you a scenario. For simplicity's sake, I'm a senior exec of a company in an industry dominated by two companies: $ME and $THEM. My company is about to release a rotten earnings report because $THEM is eating our lunch. While you're probably less likely to be caught and prosecuted, you're still trading on inside information if you buy a bunch of $THEM stock immediately in advance of your rotten earnings release.
- arawde 8y ago
  I think this is true. I would have to look to find a case where this was what happened, but I would be surprised if such a case did not already exist. I think this situation is much more difficult to find and enforce, however. As an executive, you have to file with the SEC for share purchases (I believe its either a certain number of shares or a certain $ amount bought/sold. I also believe the form is form 4) So it becomes a matter of figuring out when the senior exec knew the information and traded on it, and I think its a bit more difficult to enforce because its not your typical insider case. I like your example, because it really hits at the edges of what is material non-public information. Something that just occurred to me: if you are a senior exec, your compensation is probably tied to share ownership in $ME. Even if you trade on $THEM, and make money, you're probably going to take a pretty substantial hit on your own $ME holdings. This isn't to say its any less fraudulent/misleading, but its an interesting thing to consider. I wish I had a better answer to this scenario.
perl4ever 8y ago
Suppose you have done proprietary analysis on satellite imagery to estimate sales of a company. Since you have no relationship with the company, you aren't betraying any relationship of trust. I don't think* this is insider trading, to trade on the estimates you produced. However, the information is not public and nobody else has it. So I think a layperson might well regard it as unfair and expect it to be illegal. *This is not legal advice
- arawde 8y ago
  It may seem unfair, but I think the reason I would give as to why it isn't is: you have to pay for that source of data. Using satellite imagery to analyze sales, imho, sort of falls into the same area where HFTs pay for feeds from exchanges so they can take advantages of widening gaps in bid/ask spreads. When it comes to insider trading, it really seems to boil down to: did I obtain the information in a way where no outsider would have possibly done so? With your example, it certainly seems possible that other groups could perform the same analysis. So as you said, it wouldn't be insider trading. I think another one of the aspects of insider trading is _certainty_. If you're an insider, and you know your company is going to miss earnings, the likelihood of you making a wrong bet are near 0. If you're analyzing imagery of parking lots to see if sales at Wal-Mart are going up, theres still a non-insignificant chance that you could bet wrong. Maybe the reason theres so many cars it that they are running promotions that actually don't increase revenues in an expected way. Maybe there aren't any cars because people are taking public transit. When you're an outsider, theres way more variables that go into your trade, compared to when you're an insider and its a simple question of "how will this information about my company get reacted to?" Insider trading is probably one of the most interesting aspects of modern finance. As you can probably tell, I take most of my information from Matt Levine (he gets linked here pretty often, but his column is Money Stuff on Bloomberg (also an email newsletter so you don't use up your free articles)) Again, not an expert, take everything I say with a healthy pinch of salt.

ghaff 8y ago

Not an expert but probably #3. It's trading based on non-public information. You don't mention but is certainly just as illegal is passing on stock tips either unilaterally to friends and family, based on an arrangement to split profits, or otherwise profit indirectly. Obviously the more obfuscated (and smaller dollar) insider training is, the more difficult it is to detect.

perl4ever 8y ago
"It's trading based on non-public information." I don't think this can be an accurate characterization. Any time you buy or sell a stock, you should have non-public information in some sense - since the current price theoretically reflects all the public information. Matt Levine has written some stuff from time to time about popular misunderstanding of insider trading law in the US. One point he makes is that it's outlawed in a kind of indirect way, rather than being based on a layman's idea of fairness.