
Why Not Insider Trade on Every Company? - dsri
http://www.bloombergview.com/articles/2015-08-11/why-not-insider-trade-on-every-company-
======
nostromo
It's actually still possible to perform a specific type of legal insider
trading.

Example: you are an executive at E Corp and the company will announce its
acquisition in two months. You had previously set up planned trades to sell x
number of shares each month before then. Because the acquisition is at a
premium on the current price, you will make much less money if you go forward
with your trades before the announcement. So, what do you do? You cancel the
trades.

Was this insider trading according to the SEC? Surprisingly, no! Even though
you're profiting from insider information, the SEC rules are such that for
insider trading to occur, you actually need a trade.

[https://en.wikipedia.org/wiki/SEC_Rule_10b5-1#A_possible_loo...](https://en.wikipedia.org/wiki/SEC_Rule_10b5-1#A_possible_loophole:_canceling_plans)

Martha Stewart did exactly this before her company was acquired earlier this
year:

[http://i.imgur.com/ZikHCpP.jpg](http://i.imgur.com/ZikHCpP.jpg)

~~~
stevewepay
Politicians in Congress are explicitly allowed to insider trade based on
information they hear about. This is why congressmen's stock portfolios are
far more profitable than an average person's.

~~~
rayiner
It makes sense to insulate Congressman from insider trading charges. They are
exposed to so much inside information that the executive could bring charges
against them on a whim. Which would have significant separation of powers
concerns.

Of course, the answer to that is to require all Congressmen to put their
assets in a blind trust.

~~~
coldtea
> _It makes sense to insulate Congressman from insider trading charges. They
> are exposed to so much inside information that the executive could bring
> charges against them on a whim. Which would have significant separation of
> powers concerns._

How about disallowing them to trade altogether in the first place for as long
as they hold office?

~~~
pyre
This would make more sense if there weren't career Congress-critters, though
perhaps this would encourage movement in that direction...

~~~
lsaferite
Yeah, that is a huge issue in itself. Public office should not be a career but
something you take time out of your career to perform.

------
tokenadult
I think I will end up upvoting every share of this Bloomberg View columnist's
columns here on Hacker News. The author, Matt Levine, thinks like a hacker in
the best sense, by pushing ideas to their extremes and seeing what the
consequences might be. He adopts a humorous tone, but his columns are full of
food for thought.

[http://www.bloombergview.com/contributors/matt-
levine](http://www.bloombergview.com/contributors/matt-levine)

~~~
hkmurakami
You should also take a look at his writing at Dealbreaker, where he used to
write before joining Bloomberg View.
[http://dealbreaker.com/author/mlevine/](http://dealbreaker.com/author/mlevine/)

------
Taek
Perhaps someone will change my mind, but I see the block on insider trading
and spoofing as harmful to the financial industry overall.

Someone starts shorting a ton of Apple stock? That probably means something
big is happen at Apple, and it's not good. It's information.

Spoofing as a technique can be used to combat and inhibit other types of
trading, and is in some sense an algorithm to 'keep the opponent honest'.

As best as I can tell, the biggest reason that we as a culture are against
insider trading is because 'it's not fair'. (happy to read a response that
adds more depth to my understanding). It isn't fair, and the people with
insider information are going to make a lot of money. But in the process of
making that money they bring the information to everyone else. And insider
trading incentivizes knowing as much as possible so that you can have an edge
on the competition.

~~~
amalcon
The main reason we don't like insider trading is that we like participation in
the market by relative amateurs. A system that allows insider trading
discourages participation by amateurs, because they do not have insider
information. Insiders would earn money at the expense of these amateurs, so
it's better for them to stick to other sorts of investments to avoid this
"tax".

This isn't necessarily a problem. As a society, we've decided that we like
having amateur capital in the markets more than we want the improved
efficiency of allowing use of inside information. It's a tradeoff, and while
both options have their merits, society has chosen one way.

~~~
losvedir
> _A system that allows insider trading discourages participation by amateurs,
> because they do not have insider information. Insiders would earn money at
> the expense of these amateurs_

How so? Can you flesh out the scenario a bit since I'm having trouble seeing
how this is the case. To me, it seems like if there were no trade prohibitions
on insider trading the share price would immediately reflect inside knowledge,
thereby _protecting_ amateurs from making investments based on facts that they
don't know that others do.

~~~
omalleyt
The share price likely wouldn't reflect insider knowledge. To see this, take
an extreme example. The CEO owns less than 1% of most publicly traded
companies. Even if he was allowed to sell his whole position without public
disclosure, it wouldn't affect the stock price that much. Say he wakes up and
finds out through insider knowledge that his company will go bankrupt
tomorrow. He sells all his shares today. The stock drops a bit. It doesn't go
to 0 just because he knows it should.

A stock price reflects a weighted average of individual investor's knowledge
and their capital.

(Efficient market gets around this by assuming people are cool with not just
selling the stock but shorting it all the way until it is as low as they think
it should be. People don't tend to bet the farm (or have the ability to borrow
funds to bet the farm) like that.)

~~~
robotresearcher
But assuming that public disclosure _was_ required for insiders, the CEO
selling all their stock could drive the price down pretty quickly. People will
be watching that particular 1% closely.

~~~
intended
This assumes really fast turn arounds on this information.

There's time taken to submit data to a central clearing house and time taken
for them to publish it.

Many people may not want you to have a real time feed letting people know what
shares they have just sold.

There also exist accounting cycles and hence corresponding disclosure cycles.
CEOs can make non related entity trades, mask trades, etc. Seasoned financiers
are far smarter than the new entrant. They will find ways to reduce their
"downside", and increase their upside.

You always want to ensure that new entrants are not left to the mercy and warm
fuzzy feeling of finance experts. The rule is that they can't afford them.

------
nomailing
I am wondering if this centralized infrastructure for financial news is
actually a good idea. This could always happen again and again. All the
employees in these news companies could get a mass of insider information
which they could sell.

Isn't maybe an alternative decentralized news publishing service a better
idea? Couldn't the CEO of a company publish their financial news only on their
own website at the given publication date? Why is it necessary for these news
to be stored in some central news database days before their publishing date?
And I mean these as honest questions because I have really no idea what the
advantage would be?

And another related question: wouldn't it make sense with today's Internet
infrastructure to reduce the interval between earnings reports. Maybe it could
even be something like a continous automatic publishing of these company
finances. Always when some financials change it could directly be published.
That way all investors would at all times have the same information as the
insiders, so everyone would be on the same level. Of course some extraordinary
news like mergers or acquisitions might still give some people insider
information who prepare the deal, but at least the quarterly earnings could
not be insider information.

~~~
jedberg
> Why is it necessary for these news to be stored in some central news
> database

Amusingly it's because of the hedge funds. They want to have a limited list of
places to check for news to make sure no one gets there ahead of them.

This is why they were so upset when the Netflix CEO made something public on
Facebook -- because they weren't watching his Facebook page for news (but they
sure are now!).

The SEC actually has a very limited set of places that you can release
financial news because of this.

~~~
acconsta
I mean, hedge funds have the resources to monitor thousands of websites. Joe
Retail Investor doesn't. Reg FD was introduced to level the playing field.

------
random_rr
The tone of this article was really, like, interrupted by a prolific use of
"likes."

I wish it were so simple to hand-wave all security risks. Mr. Levine's ability
to find a MySQL tutorial was quite impressive, but his dismissal of very real
security concerns is childish. It's like saying cars are known to crash, so
quit crashing cars. It's so, like, simple!

~~~
mtsmith85
I love reading Matt Levine's writing; I enjoy the humorous tone. A bit of
Louis CK for the financial world. But I didn't get that he was dismissing the
security concerns. I read it as he was dismissing the idea that some aspects
of the hacking could have been more easily thwarted. For example, two factor
authentication is a relatively straightforward protection. Now he may have
been underselling how complex it is to implement, but I would have to agree
that items like two factor authentication are relatively straight forward
tools at this point.

~~~
ZoFreX
2 factor authentication has nothing to do with this, though, and would do
absolutely nothing to protect against this occurrence or similar ones. 2
factor authentication is great in certain situations... but only when your
code is operating correctly. If someone has achieved arbitrary code execution
(even if only at the SQL layer) it's game over. 2FA won't save you.

~~~
thefreeman
they also brute forced employee accounts (likely the sql injection was in the
employee facing section of the site)

------
uptown
Replace hackers with the NSA. Imagine the trades one could make with access to
the world's email inboxes.

~~~
Uhhrrr
Given the number of NSA employees who have confessed to abusing their access
to LOVEINT, it must have been tried already.

------
pbreit
Would it be so bad if insider trading laws just went away? Information is
spreading faster than ever. So a few Mak outsized gains on some inside info.
Is it that big a deal?

~~~
Quanticles
Corporations are supposed to operate on the behalf of their shareholders -
insider trading is in direct conflict with that

~~~
pbreit
How is that? Set up a private mailing list for shareholders, then.

~~~
jamesjyu
Not all the upcoming announcements can be shared with all shareholders. Too
much risk in leaking.

------
dmourati
I enjoyed the tone and the piece. His assessments of brute-forcing and SQL
injections were quite accurate.

------
fitzwatermellow
I've been noticing a lot of spikes across assets lately. Always timed a minute
or two before the official release print. That used to constitute a somewhat
unusual occurrence. One expects relative calm before the storm. Now it seems
to happen with every bit of data. It could be chalked up to algos pre-
positioning in anticipation. But many times if you are tracking fellow traders
on your twitter feed as well as the price action, you'll notice a cry of
"Leaked!" coupled with the price swings. I always assumed something far more
nefarious and insidery was taking place. Powerful forces manipulating markets
for various geo-political ends and so forth. So am somewhat relieved to see
ordinary everyday greed to be the culprit. Am waiting for a Nanex style expose
on this phenomenon.

------
bbcbasic
Then there is the story of the really sophisticated guys who didn't get
caught. Unfortunately that's a story you won't be reading online, but will
just have to imagine.

It really makes me question the sanity of doing this illegal trading. For as
much effort you could do something legal and make money. Maybe not as much but
surely without the risk of going to prison.

~~~
raisincakes
Sadly, insider trading is _pervasive_ on wall street. You don't read about the
guys that don't get caught, and there are a _lot_ of them. Remember, if you
can't spot the sucker at the table, you're the sucker. That's why I keep my
money far away from the stock market except for index funds.

~~~
kasey_junk
If you believe that the _entirety_ of the market is rigged, what possible
reason is there to make an exception for index funds?

~~~
raisincakes
Because individual stocks can be rigged in either direction (for or against
your position), but at the level of sector or index funds all of that activity
balances out.

------
cheez
What blows my mind is that these people don't encrypt their emails with some
form of plausible deniability envelope. I mean, if you're smart enough to set
up servers for customers of your illegal activities, you should be smart
enough to know what to avoid.

~~~
erikb
Not really, especially in East European countries where the legal system is
weak. When everybody hacks everybody every day and nobody gets sued then you
stop to worry about hiding.

------
tgpc
I believe if you become a member of the US Congress you are explicitly
excluded from insider trading laws. So you could always stand for office.

Sigh.

