I think you misunderstood his point. Any entity is allowed to trade on information that's legally available to them without violating any duty of trust -- if for example, Google decides to buy rackspace, it is perfectly legal for them to buy call options in front of the announcement to profit from the spike in value caused by the announcement, as no duty of trust is broken.
It would be, however, illegal for employees, shareholders or indeed anyone hearing about Google's intentions about the purchase to buy those options, as they would be breaking their duty of trust to Google by doing so. This holds regardless of the legal status of the entity in question -- a corporate shareholder getting privileged information from Google before the announcement would be just as screwed as an employee.
I assumed that a deal with Rackspace meant a purchase of Rackspace products. I agree that you can buy a stock before trying to buy out the company--but you can do that as an individual, too.
But in this case, the company trading on credit card data is clearly analogous to a Google employee, not to Google. They have material information about the prospects of another company, and they use that information to trade.
> I assumed that a deal with Rackspace meant a purchase of Rackspace products. I agree that you can buy a stock before trying to buy out the company--but you can do that as an individual, too.
It doesn't matter what kind of transaction Google and Rackspace are doing - it's illegal for Google employees to trade on this information and legal for Google to do so. In other words, Google employees can't trade on news of a Google deal to buy Rackspace the company or Rackspace equipment/services. Google the company is free to trade in both circumstances.
> But in this case, the company trading on credit card data is clearly analogous to a Google employee, not to Google. They have material information about the prospects of another company, and they use that information to trade.
Not at all. Insider trading is defined as improper use of corporate information by employees. Companies are free to act on their information.
It doesn't make sense to define "insider trading" as use of "improper information", let alone "non public information". Remember - a huge fraction of trades are based on non-public information.
For example, I may think that the iPad is a disaster. That's not public information, yet it doesn't make sense to restrict my ability to trade on it.
If you are a secretary working for Google, and overhear talks about the buyout and proceed to load yourself on the stock, SEC is going to want to have a word with you.
> I assumed that a deal with Rackspace meant a purchase of Rackspace products.
I don't think this would be illegal either -- with whom would Google break it's duty of trust if they bought half of Rackspace just before announcing a large deal?
> They have material information about the prospects of another company, and they use that information to trade.
I have material information of the prospects of every company I trade -- I wouldn't trade them without. What turns this into illegal insider trading is receiving that information from a source that is bound by duty of trust to not speak about it. As long as the material information about the prospects of a company does not originate from the company in question, or anyone else bound to not divulge it, it's not insider trading.
When visa data mines credit card transactions, the information so gained can be freely used to whatever purpose without fear from insider trading accusations.
That being said, I do not think it's moral or right -- the laws just were written before large-scale data mining was feasible.
If you're an individual, and you plan on buying a company, you can accumulate stock in it first without doing insider trading. That's what I mean when I say you can do that as an individual, too.
with whom would Google break it's duty of trust if they bought half of Rackspace just before announcing a large deal?
This may be accurate. I was under the impression that insider trading referred to possessing and using information that would have a material effect on the stock price. i.e. nobody's "duty of trust" is breached if a cab driver overhears his rider talking about a big deal, but I'd assume that the cab driver could get in trouble for acting on the information. If it's really about trading based on information obtained through a breach of trust, you end up in an odd situation: either any breach makes all trades insider trades (i.e. executive tells information to his secretary, who leaks it to a journalist) or any non-duty-bound link in the chain obviates the trust issue (X tells it to Y who tells it to Z--who is overheard by A, who sells the tip to B, who makes the trade.)
> If you're an individual, and you plan on buying a company, you can accumulate stock in it first without doing insider trading. That's what I mean when I say you can do that as an individual, too.
Yes, but that's because it's your information that you're buying said company.
However, there are other rules that apply to corporate take-overs. In the US, you have to disclose when you reach a certain ownership level. (And no, you can't avoid that by colluding with other people.)
> This may be accurate. I was under the impression that insider trading referred to possessing and using information that would have a material effect on the stock price.
That's why I posted the definition and link.
> i.e. nobody's "duty of trust" is breached if a cab driver overhears his rider talking about a big deal, but I'd assume that the cab driver could get in trouble for acting on the information.
Actually, the person who was overheard violated the breach of trust.
> If it's really about trading based on information obtained through a breach of trust, you end up in an odd situation: either any breach makes all trades insider trades (i.e. executive tells information to his secretary, who leaks it to a journalist)
Huh? There's at least one obvious breach of trust in that chain.
Yes, any breach makes the resulting trades insider trades. No, that doesn't imply that all trades involve such breaches.
It would be, however, illegal for employees, shareholders or indeed anyone hearing about Google's intentions about the purchase to buy those options, as they would be breaking their duty of trust to Google by doing so. This holds regardless of the legal status of the entity in question -- a corporate shareholder getting privileged information from Google before the announcement would be just as screwed as an employee.