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Comment by tptacek | Hacker News Reader

It's not very clearly insider trading, because the traders had no fiduciary duty to Chipotle. It's arguably insider trading because their relationship to Chipotle is colored by the relationship payment processors have to Chipotle. And that argument will probably prevail.

The point of Levine's post is that for the markets to work, there have to be traders trading at an advantage. The point of insider trading laws isn't to level the playing field --- that's exactly what you don't want. It's to eliminate a class of agency problems.

We can (probably should) want to deter credit card companies from trading on data mining payment data without believing that insider trading laws are the right vehicle to do that with. Privacy regulations and mandatory confidentiality agreements could set up an effective civil deterrent, rather than sporadic and incoherent SEC and criminal investigations.

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Violation of fiduciary duty is only a requirement in order to meet the "Manipulative and Deceptive Practices" part of SEC Rule 10b-5.

However there are other ways that requirement can be met for instance SEC v. Dorozhko found that a hacker using stolen information to trade was guilty of insider trading. Obviously he had no fiduciary duty however he was found to be deceptive.

If the SEC prosecute this case I imagine they'd try to extend the argument presented in Dorozhko.

Yes, that's what I was alluding to in my first paragraph. (I did read the article; I am sort of religious now about reading Matt Levine, who is awesome.)

Or O'Hagan misappropriation.

But don't insider trading rules apply even to people with no real agency power? A secretary who overhears that a drug trial failed is not in a position to affect how the company reacts to that information, and probably does not have enough capital to move the stock. But she would still be violating insider trading laws if she sold all her stock before the press release was issued.

I can see why professional traders and speculators might not want to level the playing field, but I don't see why long-term investors would feel that way. When I invest in stocks, I intend to hold for a long time. I'm betting on the business success of that company or group of companies, not on inequalities in the availability of information about them.

It's not in the interests of long-term investors to keep advantaged traders out of the market. The alternative to the participation of informed investors is mispricing. Fundamentals investors want prices to reflect actual value, too.

I feel like this begs the question of information inequality, though. If all traders were equally informed, then mispricing would be avoided as well. And without the complexity of trying to infer information from the trades of others.

Isn't this what insider trading laws try to do? The law obviously can't keep insiders from learning information first, so the law prohibits insiders from acting as investors until the info is public. At worst this creates a lag between information and price, but that wouldn't matter much to long-term investors.

Not that insider trading laws can create total information awareness for every investor. But at least it gives every investor a more equal opportunity to find and use information.

minor edit for clarity

The laws keep insiders from doing that, but it does not prevent other people from amassing non-public data through research, investigation, or financial modeling. Instead, the law protects the products of those activities as trade secrets, thus enshrining into law the idea that some traders do in fact get to be advantaged with non-public information.

I'm having a hard time thinking of non-public data that would be legal to trade on. The examples in the article and this thread all seem like public information. Anyone can observe a sales floor, or a parking lot, or a store entrance. Anyone can observe the IR radiation coming off oil tanks. Anyone can observe tweets.

Anyone with the time and means to do so, anyway. Anyone could do these things; but most don't. For the people who do, what is protected is their investment in gathering and analyzing the data. The law does not grant Person A access to the data set of Person B--true--but the question is whether Person B could do their own work to gather the same data set.

Whereas information that is only available, in any form, to Person A would be considered non-public, and not legal to trade on.

I've always heard this called mosaic theory, not trade secrets. https://en.wikipedia.org/wiki/Mosaic_theory_%28investments%2...

> I feel like this begs the question of information inequality, though. If all traders were equally informed, then mispricing would be avoided as well. And without the complexity of trying to infer information from the trades of others.

If all traders were equally informed (perhaps by a law that any information you wanted to trade on had to be public), there would be no way for people to profit by digging up new information. We (society) like it that analysts have a financial incentive to figure out the truth about how well a company is doing - whether that be by coming up with a better model of how one industry affects another (which will ultimately lead to better allocation of resources), or doing the legwork to realise that a particular company is a massive fraud (which leads in a more direct/obvious way to better allocation of resources).

But we don't want them to just bribe insiders - that causes agent-principal problems, gives certain market participants unfair advantages, and all the rest of it. Hence the law, where figuring out these things through research is encouraged, but getting them from insiders is illegal.

The duty that has been breached is to Capital One in this case, as established by case law.

See third paragraph of my comment. :)

If I read it correctly your third paragraph describes how things should work. I'm saying that misappropriating 3rd party information has already been established by case law to be insider trading.

I might be wrong, but let me venture this:

No. US v O'Hagan did not establish misappropriation as "insider trading". It established it as fraud, and as an SEC §10(b), which covers a broad range of securities fraud that is not describable as insider trading.

The syllabus for the case itself seems to be at pains to distinguish misappropriation from insider trading.

The importance of the distinction is that the Capital One case is something the spirit and letter of the law wants to deter, while satellite imagery of commercial activity isn't, despite it too being an example of market actors leveraging their own access and assets to gain an advantage in the market.

I eagerly await correction. :)

I believe that misappropriation theory is jurisprudence developed from 10(b) so a defendant would be found guilty with respect to 10(b), a "fraud".

http://www.sec.gov/answers/insider.htm (search for "lawyers")

http://en.wikipedia.org/wiki/Insider_trading#Misappropriatio...

http://meyersandheim.com/how-to-win-an-insider-trading-case/ (misappropriation section)

The misappropriation references in this speech:

http://www.sec.gov/news/speech/speecharchive/1998/spch221.ht...

also clarify the relationship, which according the SEC revolve around the obligations of "trust and confidence".

I got the alternate impression from reading the O'Hagan syllabus and 10b-5 itself. Oh well!.

I've pushed this point far past a point at which I'm comfortable defending it. :)

If this is just a terminology debate, O'Hagan-style misappropriation theory cases are called "insider trading" cases by nearly everyone, including the SEC[1], the Justice Department[2] and the SDNY (a judge recently issued an opinion discussing "insider-trading cases prosecuted under a misappropriation theory"). They are usually contrasted with "classical theory" insider trading cases.

[1] http://www.sec.gov/answers/insider.htm

[2] http://www.justice.gov/usao/nys/pressreleases/December13/Wei...

Conceding! Conceding! Eject! Eject! Eject! :)

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