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The laws also forbid sharing inside information, yet if you have a company conducts its own “research” to discover inside information from others before its pub

The laws also forbid sharing inside information, yet if you have a company conducts its own “research” to discover inside information from others before its published that doesn’t make it legal. The point of many trading laws is to prevent trading based on non public information. Privately conducted polls on political votes is definately non-public information, and in order for them to trade based on them they should publish first, which would likely also deminish the returns since suddenly they aren’t the only ones aware of the public/poll disconnect.

marcoperaza 8y ago
At least in the US, trading based on non-public information is totally fine, unless trading on it would violate a duty of trust to the source of the information [1] (which can be indirect, e.g. an employee tells his wife about some insider information: she had a duty of trust to him, and he to the company/shareholders, so she can be prosecuted for trading on that.) The savvy prediction of events exogenous to a company’s operations is very much not insider trading. [1] It’s a little more complicated, but I think this is as good a succinct formulation as one can hope for.
- joshuamorton 8y ago
  Indeed, there's an article I recall reading (here on HN I think, but I can't find it) that was about, essentially, a person who would short companies (I think specifically pharma companies) and then publish negative articles about them. Think "company A's research about xyz drug is false and misleading". This wasn't fraud because these articles were true. This is entirely legal. Indeed, there's arguments to be made that this should be encouraged, since it indirectly provides a financial incentive for people to do research into firms and keep the market fully informed. Of course, you have to have a very specific savvy to gain from that kind of scheme, but still.
  - goodcanadian 8y ago
    Well, market manipulation is illegal. If the articles are true (factual), the activity is probably OK, but if the individual is making up rumours with the primary goal of affecting the market to profit from it, that is definitely illegal.
    - joshuamorton 8y ago
      Hence my clarification that it wasn't fraud because the articles were true (or at least based on enough evidence to clearly not be fabrication). Fraudulent market manipulation is illegal (such as that based on fabricated or material nonpublic information). Market manipulation when based on good-faith information discovered legally is entirely legal.
  - talltimtom 8y ago
    > This wasn't fraud because these articles were true. And it wasn’t insider trading because the reports didn’t include new non-public information. If he had information about for instance he outcome of a phase 3 drug trial and bought based on it And then released the results early he would have been breaking the law.
    - joshuamorton 8y ago
      Not a lawyer, but if my understanding is correct, this is only relevant if it is a phase 3 drug trial by that company. In other words, if pharma company A is doing research on a drug and is publishing stuff, and organization B is also doing similar work (and to simplify, let's say they aren't public, they're a private research lab that isn't related to company A), if org B finds evidence that company A is wrong, they can short A then publish. (and this is pretty much exactly what happened with brexit) I don't know where exactly this gets to when shorting competitors. In other words, if Pfizer and Merck are both rushing to get the same compound/drug trialed and onto the market, and Pfizer is running ahead of Merck, but finds that their drug fails in phase 3, they obviously can't short themselves, but they might be able to short Merck, because they don't actually have any MNP about Merck's trial. But again, I'm not really sure how that works in general.
- talltimtom 8y ago
  > The savvy prediction of events exogenous to a company’s operations is very much not insider trading. So asking a representative subset of Tesla’s employees what their numbers are going to be prior to reveal is not insider trading? If that’s the case then I need to start gathering fundes enough to pay them for the info and make a huge bet.
  - skybrian 8y ago
    That would be illegal because the employees of firm have a duty not to share confidential info about the company. But, say, inferring that a retailer will do well by counting cars in the parking lot or doing customer polls would be fine in the US. The customers can talk all they want. (Not legal advice. I get this from Matt Levine, who is also not a lawyer.)
    - marcoperaza 8y ago
      >But, say, inferring that a retailer will do well by counting cars in the parking lot or doing customer polls would be fine in the US. The customers can talk all they want. It’s worth noting that if you got that information by virtue of working for a company that did such research, and that company had a policy preventing you from sharing that information, then you could be found guilty of insider trading, under the misappropriation theory.
thedufer 8y ago
I think this is a UK/US disconnect. In the UK (and much of Europe) the point of many trading laws is to prevent trading on non-public information. In the US we tend to think this is a dumb goal because much of the point of markets is to incentive price discovery, which is done primarily via trading on research. Thus, we tend to have a hard time believing that that is what the law really means, even if it is what it says.
- benj111 8y ago
  I think much of Europe is like this, not so much Britain. Matt Levine (highly recommend) spends time discussing this type of thing. A recent somewhat relevant article https://www.bloomberg.com/opinion/articles/2018-12-03/insider-trading-in-the-potato-trade https://www.bloomberg.com/opinion/articles/2018-12-03/inside...
nabla9 8y ago
> discover inside information >prevent trading based on non public information You completely misunderstand what inside trading means. Inside trading prevents company insiders from trading with the company they work for. Insider trading laws are there to protect shareholders. It's completely fine to use non public information about world events to trade.
- enraged_camel 8y ago
  >>It's completely fine to use non public information about world events to trade. I don't believe it is legal for outsiders to make trades based on non-public information they have acquired from company insiders. For example, if I am the CFO of a publicly traded company, I cannot come to you and whisper in your ear that we just got hit with a massive data breach, because doing so would give you the opportunity to dump your stocks based on that non-public information.
  - kasey_junk 8y ago
    There is a major schism in this between the US and Europe (that I only learned about in a recent HN thread). In the US insider trading laws are geared around protecting shareholders from insiders. Solving for the agency problem. In that case an outsider who finds non-public data and trades on it is likely (though the complexity of this is one of the downsides of the regine) not insider trading. In many European regimes the goal is information parity. In that case outsiders can generate material non-public data, and thus illegally trade on it. As someone who spent a lot of time under the US regime the European model blows my mind, but in objective terms there isn’t anything bizarre about it.
    - sokoloff 8y ago
      > outsiders can generate material non-public data, and thus illegally trade on it. It does seem (more than) a little bizarre to me. If I understand your post correctly, in Europe, I could do traffic counts at malls, conclude (correctly) something about a company's sales from that, trade profitably based on that conclusion, and be prosecuted successfully for it? If that's the case, how should I create my own opinion about the state of a company in order to decide how much to bid (or ask) for the shares of that company? Am I just supposed to blindly make investments since any amount of private research is bound to be deemed illegal? It seems that the entire purpose of research is to generate an informed opinion which differs from the current public opinion. We've found hedge funds placing orders with the presumed intention of deriving order volume information from sequential IDs that we inadvertently leaked in the shipping process (since fixed). My view is "good on them for thinking of it!" Is trading based on that illegal as well?

marcoperaza 8y ago

At least in the US, trading based on non-public information is totally fine, unless trading on it would violate a duty of trust to the source of the information [1] (which can be indirect, e.g. an employee tells his wife about some insider information: she had a duty of trust to him, and he to the company/shareholders, so she can be prosecuted for trading on that.) The savvy prediction of events exogenous to a company’s operations is very much not insider trading. [1] It’s a little more complicated, but I think this is as good a succinct formulation as one can hope for.

joshuamorton 8y ago
Indeed, there's an article I recall reading (here on HN I think, but I can't find it) that was about, essentially, a person who would short companies (I think specifically pharma companies) and then publish negative articles about them. Think "company A's research about xyz drug is false and misleading". This wasn't fraud because these articles were true. This is entirely legal. Indeed, there's arguments to be made that this should be encouraged, since it indirectly provides a financial incentive for people to do research into firms and keep the market fully informed. Of course, you have to have a very specific savvy to gain from that kind of scheme, but still.
- goodcanadian 8y ago
  Well, market manipulation is illegal. If the articles are true (factual), the activity is probably OK, but if the individual is making up rumours with the primary goal of affecting the market to profit from it, that is definitely illegal.
  - joshuamorton 8y ago
    Hence my clarification that it wasn't fraud because the articles were true (or at least based on enough evidence to clearly not be fabrication). Fraudulent market manipulation is illegal (such as that based on fabricated or material nonpublic information). Market manipulation when based on good-faith information discovered legally is entirely legal.
- talltimtom 8y ago
  > This wasn't fraud because these articles were true. And it wasn’t insider trading because the reports didn’t include new non-public information. If he had information about for instance he outcome of a phase 3 drug trial and bought based on it And then released the results early he would have been breaking the law.
  - joshuamorton 8y ago
    Not a lawyer, but if my understanding is correct, this is only relevant if it is a phase 3 drug trial by that company. In other words, if pharma company A is doing research on a drug and is publishing stuff, and organization B is also doing similar work (and to simplify, let's say they aren't public, they're a private research lab that isn't related to company A), if org B finds evidence that company A is wrong, they can short A then publish. (and this is pretty much exactly what happened with brexit) I don't know where exactly this gets to when shorting competitors. In other words, if Pfizer and Merck are both rushing to get the same compound/drug trialed and onto the market, and Pfizer is running ahead of Merck, but finds that their drug fails in phase 3, they obviously can't short themselves, but they might be able to short Merck, because they don't actually have any MNP about Merck's trial. But again, I'm not really sure how that works in general.
talltimtom 8y ago
> The savvy prediction of events exogenous to a company’s operations is very much not insider trading. So asking a representative subset of Tesla’s employees what their numbers are going to be prior to reveal is not insider trading? If that’s the case then I need to start gathering fundes enough to pay them for the info and make a huge bet.
- skybrian 8y ago
  That would be illegal because the employees of firm have a duty not to share confidential info about the company. But, say, inferring that a retailer will do well by counting cars in the parking lot or doing customer polls would be fine in the US. The customers can talk all they want. (Not legal advice. I get this from Matt Levine, who is also not a lawyer.)
  - marcoperaza 8y ago
    >But, say, inferring that a retailer will do well by counting cars in the parking lot or doing customer polls would be fine in the US. The customers can talk all they want. It’s worth noting that if you got that information by virtue of working for a company that did such research, and that company had a policy preventing you from sharing that information, then you could be found guilty of insider trading, under the misappropriation theory.

thedufer 8y ago

I think this is a UK/US disconnect. In the UK (and much of Europe) the point of many trading laws is to prevent trading on non-public information. In the US we tend to think this is a dumb goal because much of the point of markets is to incentive price discovery, which is done primarily via trading on research. Thus, we tend to have a hard time believing that that is what the law really means, even if it is what it says.

benj111 8y ago
I think much of Europe is like this, not so much Britain. Matt Levine (highly recommend) spends time discussing this type of thing. A recent somewhat relevant article https://www.bloomberg.com/opinion/articles/2018-12-03/insider-trading-in-the-potato-trade https://www.bloomberg.com/opinion/articles/2018-12-03/inside...

nabla9 8y ago

> discover inside information >prevent trading based on non public information You completely misunderstand what inside trading means. Inside trading prevents company insiders from trading with the company they work for. Insider trading laws are there to protect shareholders. It's completely fine to use non public information about world events to trade.

enraged_camel 8y ago
>>It's completely fine to use non public information about world events to trade. I don't believe it is legal for outsiders to make trades based on non-public information they have acquired from company insiders. For example, if I am the CFO of a publicly traded company, I cannot come to you and whisper in your ear that we just got hit with a massive data breach, because doing so would give you the opportunity to dump your stocks based on that non-public information.
- kasey_junk 8y ago
  There is a major schism in this between the US and Europe (that I only learned about in a recent HN thread). In the US insider trading laws are geared around protecting shareholders from insiders. Solving for the agency problem. In that case an outsider who finds non-public data and trades on it is likely (though the complexity of this is one of the downsides of the regine) not insider trading. In many European regimes the goal is information parity. In that case outsiders can generate material non-public data, and thus illegally trade on it. As someone who spent a lot of time under the US regime the European model blows my mind, but in objective terms there isn’t anything bizarre about it.
  - sokoloff 8y ago
    > outsiders can generate material non-public data, and thus illegally trade on it. It does seem (more than) a little bizarre to me. If I understand your post correctly, in Europe, I could do traffic counts at malls, conclude (correctly) something about a company's sales from that, trade profitably based on that conclusion, and be prosecuted successfully for it? If that's the case, how should I create my own opinion about the state of a company in order to decide how much to bid (or ask) for the shares of that company? Am I just supposed to blindly make investments since any amount of private research is bound to be deemed illegal? It seems that the entire purpose of research is to generate an informed opinion which differs from the current public opinion. We've found hedge funds placing orders with the presumed intention of deriving order volume information from sequential IDs that we inadvertently leaked in the shipping process (since fixed). My view is "good on them for thinking of it!" Is trading based on that illegal as well?