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Comment by gammateam | Hacker News Reader

> said the same criminals also stole advance press releases sent to three newswire services

Yeah I remember the charges against those people too

Basically newswire services get hacked and people get the earnings reports beforehand

SEC gets hacked and people get the earnings reports beforehand

I think public resources shouldnt be spent on that. Prosecute the hacking but just drop the “trading on material non public information but only in the equities capital markets and only when there is a duty from the source to keep things nondisclosed” sanctions. It is so narrow but extremely expensive to prosecute, has with little efficacy in stopping the behavior, and incorrectly effects the collective conscious on what can be traded and when. People at this point think its actually illegal to have a trading advantage in any context

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I don't understand your argument for not prosecuting MNPI trading. Are you saying that because the general public doesn't understand what MNPI is, the law shouldn't be enforced?

Are you taking issue with reason the law exists, or just that the people don't understand it?

And what's your basis for saying it's ineffective? From my experience, insider trading laws are taken very seriously by most of the industry.

> basis for saying its ineffective

Yes, they are effective at chilling speech and forms of legal trading. They are not effective at preventing trading on information, for example, the SEC and DOJ secured indictments against Ukrainians and Russians which it will never extradite. Wow a pen stroke after an expensive investigation, congratulations. Fix your damn IT systems if you want confidence in the securities market.

> are you taking issue with reason the law exists

Yes, I am. The industry takes these laws seriously without the SEC because all the SROs already had these prohibitions before the SEC copied and pasted some parts into the Code of Federal Regulations or created 10b-5 convictions that are SOMETIMES upheld by appeals courts before stripping them down in other circuits.

Insider trading is a balance.

On the one hand, we want market prices to be accurate. This means we want people with material information to trade on that information.

On the other hand, we need some fairness in a market. This is mostly to ensure people keep trading. In a world were inside-info is commonplace, trading without it is just stupid. This would cut off a lot of people from investing.

The line needs to be drawn somewhere. The US approach of insider trading requires a broken 'duty to keep secret' isn't nice, but considering the above trade-off I think it is better than "All non-public information is off-limits". Especially because it captures the 'most disruptive' form of insider trading: people who work at a company that is getting acquired / going bankrupt.

> On the other hand, we need some fairness in a market

American insider trading law has nothing to do with fairness. It is based on theft of information. In this case, the hacker’s stole information from the SEC that belonged to the reporting companies.

(This is a commonly misunderstood alley of securities law.)

That's interesting. I was digging around, and this piece[1] goes into detail, but early on they summarized the rationale for insider trading laws.

"One objection is that it violates the fiduciary duties that corporate employees, as agents, owe to their principals, the shareholders (Wilgus 1910)."

That supports the theft formulation.

"A related objection is that, because managers control the production of, disclosure of, and access to inside information, they can transfer wealth from outsiders to themselves in an arbitrary and hidden way (Brudney 1979; Clark 1986)."

Again, supports the theft formulation.

"The economic rationale advanced for prohibiting insider trading is that such trading can adversely affect securities markets (Khanna 1997) or decrease the firm’s value (Haft 1982)."

This seems like the fairness argument, though.

[1]: https://www.econlib.org/library/Enc/InsiderTrading.html

it violates the fiduciary duties that corporate employees, as agents, owe to their principals, the shareholders

Insider trading regs, as currently enforced in USA, get this exactly backwards. Senior C-suiters are not prohibited from trading their firm's stock. They only have to carefully choreograph that trading with respect to other events. They get as much advance time as they need to do this, and as much professional help as they (or the firm) can afford. They get all this time to scheme and pre-arrange, precisely because insider trading laws exist to hammer the lowly middle managers who would like to do their own trading on inside information.

The sooner trading based on information occurs, the sooner that information is public. The effect of these regulations is to keep secrets and make misguided investment more likely. All executives of a public corporation are in a conspiracy against the investing public. Insider trading laws function precisely to punish defectors from that conspiracy. This defection should rather be encouraged, so these are yet another set of laws the effect of which is entirely backwards from their supposed justification.

These are economic arguments. I was speaking solely to the law.

Not sure why you got downvoted, this is correct. If you, for example, overhear an executive on the street discussing how his company is going to bomb their earnings report, you wouldn't get in trouble for trading on that (if you somehow got "caught"). It's unfair in a sense because you just got lucky and stumbled into material, non-public information, but you also didn't really do anything wrong.

if that were the case, it would be legal for a company director to trade on information they gleaned from an internal meeting. Which, as far as I understand, it isn't.

> if that were the case, it would be legal for a company director to trade on information they gleaned from an internal meeting

That’s theft of company (read: shareholders’) information by a fiduciary.

Remember: America has no statute barring insider trading. The rules were developed through case law. (There’s a hypothetical of “if a company insider shouts material nonpublic information on the street and you trade on it, is that insider trading” that lawyers love to opine on, but to my understanding that’s never come up in court.)

This is a common misunderstanding with respect to insider trading.

The 1933 Securities Act, 1934 Securities Exchange Act and the Sarbanes-Oxley Act of 2002 all directly address insider trading.

In very limited ways. For example, the 33 Act bans short-swing trading and certain specific activity by holders of more than 10% of a stock. The vast majority of insider trading enforcement is brought forth on securities antifraud and fiduciary obligation statute interpreted through extensive case law.

That's fair, but it's also generally how the modern regulatory state works: Congress lays out a rough sketch of the laws and regulatory agencies and courts hash out the details. And counting incidences of enforcement doesn't tell you where the bulk of doctrine is since someone who plainly violates the law is quickly shut down, while the authorities are forced to play cat and mouse with the ones who skirt the law.

No, they all address illegal insider trading. If all forms of legitimate trading on material nonpublic information were illegal, then information asymmetry in the market would be outlawed. That would make it impossible to legally profit using any kind of financial research.

"If all forms of legitimate trading on material nonpublic information were illegal, then information asymmetry in the market would be outlawed."

FWIW, I'm not expressing an opinion on insider trading, just arguing that this specific claim is overly broad.

If your only relation with a company is to own stock in it, you're not an insider, but any research you do may be based on public information, but is nevertheless material and as private as you keep it.

And there's a lot of research to do. The economic fable "I, Pencil" is about the sheer number of firms that any given firm is indirectly dependent on and indirectly affects. Thus, if you see shocks affecting any upstream suppliers, the shocks are public information but your knowledge that it's relevant to the firm you're invested in is private to you.

That’s theft from the corporation they work for. GP is 100% correct in this case. Just read Matt Levine’s Money Stuff. He goes over this stuff a lot.

I'm not disagreeing with you because I have no clue about this stuff, but man that is an odd usage of the word 'theft'. Sounds more like improper use to me, e.g., getting a speeding ticket while using a company truck. I didn't steal the truck, but I used it in a way which is unlawful.

Well, say your company is going to buy another company. You know about it, and buy shares of tbe other company ahead of the public anouncement.

You are essentially stealing from your own company, since your purchase of shares will drive up price and result in your employer paying more than they otherwise would have.

Though for the record, I think insider trading should be legal, or at least should be a civil instead of a criminal matter.

The purpose of financial markets is decentralized price discovery and preventing the trading of certain types of non-public information is totally counterproductive in that regard.

It's more like you were authorized to drive the truck to make deliveries, but you used it to pick up your kids from school and go grocery shopping without your employer's permission, causing wear and tear on the truck that caused economic damage to your employer without their permission.

Ok, but the point is that, in either case, the driver isn't going to be charged with motor vehicle theft.

Don't assume that insider trading laws make sense...

>This is mostly to ensure people keep trading. In a world were inside-info is commonplace, trading without it is just stupid.

I find this line of reasoning hard to swallow. As an individual I have significantly less info than hedge funds and other professionals but that doesn't change the fact that I want to buy Apple or whatever because I think it will grow over the next 5 years.

Now if you add in the scenario where all of the Apple employees are buying and selling based on unreleased earnings, that doesn't change my want to buy the stock at all.

How does Tim Cook buying some Apple shares right before good earnings change anything for a regular investor?

It is not so much about the retail investors as it is about the professionals. Most of the market is determined by them, in a world without them, prices will less accurately reflect the 'true value' of stocks. As such, we want to keep them trading. We also kind of want to dis-incentivize the professional traders from engaging in massive corporate espionage. Just because that is an arms-race that isn't very productive.

You keep saying "we" -- who are you speaking for?

Your argument that professional traders would stop trading in unison if insider trading laws were abolished seems entirely unconvincing to me.

Tim Cook (and all other Apple employees) are legally disallowed from buying or selling Apple stock outside of specific, well-defined trading windows. In particular, they cannot legally benefit from unpublished earnings information.

> all other Apple employees) are legally disallowed from buying or selling Apple stock outside of specific, well-defined trading windows

I don't think this is true, at least for most employees. I think this only applies at higher levels, though of course insider trading laws are still in force.

Sure so insider trading is almost exclusively a creature of the executive branch, with the general antifraud provision under “Section 10b-5” used to prosecute it most of the time, a provision only the securities regulatory can pursue (in conjunction with DOJ for the criminal prong)

The legislature fails to have consensus on this topic and hasn’t weighed in since the 1980s (where it was only to add statutory damages if a conviction was achieved, but no clarity regarding how and when it could be achieved)

And courts strip or uphold nuances various of the agency’s sentiment leaving this to be largely unsettled territory, all while the people that staff these agencies have the same unclear and misguided (when courts later disagree) view on what kind of trading is or isnt prohibited

Other markets are completely exempt: Futures, currencies, metals, nike shoes, non-securities digital assets. I think this aberration for the securities market should be re-evaluated, as it is an expensive dragnet.

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