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How exactly is this insider trading? Insider trading is a fairly specific concept, and it doesn't seem to be relevant here (for example, this informal descripti

How exactly is this insider trading? Insider trading is a fairly specific concept, and it doesn't seem to be relevant here (for example, this informal description is clear enough and doesn't apply: http://www.sec.gov/answers/insider.htm http://www.sec.gov/answers/insider.htm). When a company trades with a bank to manage its risk, it gives information away by telling the bank that it wants to trade. That is not "insider" information at all. What it gets in return depends on how the company negotiates the price; it could get nothing at all, in which case it's a bit of a failure on its part. The bank is under no obligation to not use that information to make guesses about the market situation. That information is valuable to the bank, and the bank might even offer discounts to the client to get the client to trade with it first. If the company believes it leaves money on the table by disclosing the information about its order flow, it's free not to deal with the bank. What you're describing is mostly market-making, there's no insider trading here. P.S. Another thing this is not is front-running. If you come to me wanting to trade, I trade with you, complete the trade, then decide for myself that you're clever and you probably know where the price will go, then trade for myself, that is not front-running because of the order in which those things happened. If you "leave money on the table" by disclosing to me what you know about the price and I take advantage of that, conventional market theory says it's kind of your own fault, regardless of how unhappy you are about it. There are things you can do to not disclose such things, such as trading with many dealers at once. In fact, the skill of trading without moving the market is really valuable.

ealloc 12y ago
Umm, the site you linked appears to say exactly the opposite. Here's what is says: > Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Here is an example it gives of insider trading: > Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded; Isn't that exactly what the parent is describing? The banks used nonpublic information given to them to provide other services.
- conistonwater 12y ago
  As far as I can tell, I interpreted that page correctly. When a company approaches a bank to make a trade, there is no relationship of trust and confidence between them (unless there's some specific legal promise that says otherwise). Why do you think there is/should be? That page gives examples of people in such relationships: corporate officers, directors, employees, friends of employees, etc, who use a company's private information to trade for themselves. But when a company (rather than some privileged employee), approaches a bank, and reveals that it wants to make a trade, it has no special relationship with the bank. Another thing is that the meaning of "securities" is quite specific, and doesn't cover commodities. I don't think this would be insider trading even with securities. Yet another downside of very broad interpretations of insider trading is that if someone invests time and effort into studying market conditions, the resulting research is non-public, yet they would be perfectly justified in trading on their own non-public information. It is only specific cases of non-public information obtained through privileged access that are insider trading. A bank having access to a company's order flow by having that company reveal the flow to them is not engaged in insider trading, it's just doing a good job of participating in the market and studying market conditions. Someone else who wants to buy/sell the commodities from the bank gets a better price as a result. If the bank didn't have a good idea of the market conditions, it would offer worse prices to compensate itself for the uncertainty.

ealloc 12y ago

Umm, the site you linked appears to say exactly the opposite. Here's what is says: > Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Here is an example it gives of insider trading: > Employees of law, banking, brokerage and printing firms who were given such information to provide services to the corporation whose securities they traded; Isn't that exactly what the parent is describing? The banks used nonpublic information given to them to provide other services.

conistonwater 12y ago
As far as I can tell, I interpreted that page correctly. When a company approaches a bank to make a trade, there is no relationship of trust and confidence between them (unless there's some specific legal promise that says otherwise). Why do you think there is/should be? That page gives examples of people in such relationships: corporate officers, directors, employees, friends of employees, etc, who use a company's private information to trade for themselves. But when a company (rather than some privileged employee), approaches a bank, and reveals that it wants to make a trade, it has no special relationship with the bank. Another thing is that the meaning of "securities" is quite specific, and doesn't cover commodities. I don't think this would be insider trading even with securities. Yet another downside of very broad interpretations of insider trading is that if someone invests time and effort into studying market conditions, the resulting research is non-public, yet they would be perfectly justified in trading on their own non-public information. It is only specific cases of non-public information obtained through privileged access that are insider trading. A bank having access to a company's order flow by having that company reveal the flow to them is not engaged in insider trading, it's just doing a good job of participating in the market and studying market conditions. Someone else who wants to buy/sell the commodities from the bank gets a better price as a result. If the bank didn't have a good idea of the market conditions, it would offer worse prices to compensate itself for the uncertainty.