6 ms·

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

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.

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.