The recent Kodak situation (where a huge options bonus was given to their CEO the day before announcing a major government loan) goes to show how little some executives are worried about insider trading prosecution.
There was a lot weird about that deal, but you've highlighted the one thing that is pretty clearly not insider trading.
Had the CEO bought a bunch of shares, that would very possibly be insider trading, because he is (presumably) trading on information that doesn't belong to him, but belongs to the company, ie, the board. In the US, insider trading is a crime about misappropriation of information.
But the board can do whatever they want. They can grant the CEO a large cash bonus, at any time, for any reason or no reason. And they can grant him a chunk of valuable options. And they can certainly do so because of a soon-to-be-announced deal, because again, they're the ones who "own" that information.
Now, why the board might have thought that was a good idea, and to what extent the board was fulfilling their fiduciary duty to the stockholders is a separate question. Giving employees who do a good job a bonus is pretty routine, but on the other hand, just randomly giving the CEO an (effective) giant sack of cash is very much not routine, and there's a lot of practical reasons why companies do not usually do that. "It might violate insider trading laws" is, however, not one of them. :)
Im not super familiar with options so maybe I'm misunderstanding how the grant works. But the CEO hasn't actually traded anything. Isn't that a prerequisite for insider trading?
> Giving CEO James Continenza options to buy 2 million shares at prices up to $12, when the stock was trading at $2.62, the day before an announcement that sent the stock up to $21.85, seems (1) generous and (2) well-timed.
Assuming the options grant was coordinated with the loan deal (so we don’t need any innuendo about the suspicious timing), would that be insider trading? Couldn’t a company explicitly give a bonus to an executive as a reward for winning some business? Matt Levine makes a similar point in the article you linked.
==Assuming the options grant was coordinated with the loan deal (so we don’t need any innuendo about the suspicious timing), would that be insider trading?==
We shouldn’t assume that considering the Kodak gave a completely different reason:
“The options were granted to shield Continenza’s overall stake in the company from being diluted by a $100 million convertible bond deal clinched in May 2019 to help Eastman Kodak stay afloat, according to the person’s account.”
My guess is that insider trading practices are simply getting smarter. e.g. receive a hot insider tip? In the old days they'd just buy up a bunch of that stock. Nowadays, there are systems that can trigger diversified purchases across multiple asset classes & markets that end up reaping just as much profit (if not more), while obfuscating the financial ties.
What I'm about to say will probably trigger a backlash, but...bitcoin is a public, immutable ledger. Why would someone think that would be a good idea to do crime in? Are bitcoin tumblers really good enough? You need to place a lot of trust in actors whose desires may not always align with yours.
Better idea would be to just split the winnings with them.
Insider trading is one of those crimes where it is a bit ambiguous as to what the crime is (at least to me). Information travels with some speed and there will always be people with access to better information making better decisions.
We have much better technology these days. Rather than making trading some sort of crime we should just have a "relevant persons" standard where CEOs and anyone who has close contact with them have to register what they are about to do a few days before they make any trades of shares in the company.
It is fundamentally a bit silly have a situation where it is illegal for someone to make best decision given their knowledge. We can safely guess that the professional traders are leveraging every possible edge, fair or not, SEC regulation or not if they think they can get away with it.
> Insider trading is one of those crimes where it is a bit ambiguous as to what the crime is (at least to me). Information travels with some speed and there will always be people with access to better information making better decisions.
If you exploit information assymetry to make a profit, then your profit is coming at the expense of whoever had less information than you and made the transaction nonetheless. The argument goes, if you had perfect information symmetry, then the transaction would not have occurred, as the person who was willing to buy or sell the stock (for your profit, with information assymetry) would rather keep the profit for themselves.
If insider trading occurs at a large enough scale, then market players begin to assume that the only plays available to them are offered by people seeking to exploit information assymetry, therefore all plays are losing plays. The result is that nobody participates in the market, and the market as a whole becomes worthless. Stop trying to think of insider trading as a crime that victimizes whoever bought or sold the shares from the person with more information, and try to see it as a crime that undermines the common infrastructure that the economy relies upon.
> The argument goes, if you had perfect information symmetry, then the transaction would not have occurred, as the person who was willing to buy or sell the stock (for your profit, with information assymetry) would rather keep the profit for themselves.
Additional relevant context: whilst most trades can be considered to have winners and losers, in the case of insider trading the executives responsible have created losers from the [former] shareholders they're being paid to work for.
Aside from undermining trust in their communication if they're intentionally concealing information to profit from, the other problem is that it's easier for executives to create insider trading opportunities by making unexpectedly bad decisions than unexpectedly positive announcements...
You're right, but to be fair, you can have such a conflict of interest within privately held companies as well, where it would be well outside the scope of the SEC and entirely at the risk of private investors. Also, in some very notable examples of public companies where executives hold too large of a share of equity (primary example: Mark Zuckerberg and Facebook), public shareholders are unable to hold management accountable for decisions which public shareholders consider to be against their interests.
So either one or both are true: such a scenario is better handled by corporate boards, and/or the SEC needs more teeth to prevent the consolidation of ownership / control of public companies.
Except exploiting information assymetry is the raison d'etre for HFT, buying satellite pictures of parking lots [1], building private point-to-point networks & leveling mountains [2][3]
One could argue the trust has been gone for a while & yet the market is still going.
The market is composed of millions of participants. Nobody is saying it is "fair" (what does it even mean? ) but it definitely is a consensus of all these participants.
Don't fall in the trap of watching after-the-fact movies about previous crisis, and conclude that "some guys knew it all along but the system tried to hide it". That is not the reality.
The reality is that systems at play are complex, every single day thousands of analysts predict an upcoming crisis, while other thousands predict the opposite.
When you don't understand a price move, it's actually quite difficult to know whether the others are in the wrong and you know better, or if the others just know more and you're in the wrong.
Watching movies about some guys that were right does not mean it's easy to know..
> Information travels with some speed and there will always be people with access to better information making better decisions.
Insider trading is not about having better information than others. People spending effort to figure out better data sources and better ways to value stock is one of the reasons why we even have public financial markets in the first place.
No, the crime of insider trading is about breach of trust: it's only a crime if you obtained the information in some sort of confidence relationship with the company. So, trading based on your intelligence on how much inventory a company moves, obtained through analysis of non-public satellite photos is completely legal, however, doing the same when you have access to the same data as a data center tech is not.
> CEOs and anyone who has close contact with them have to register what they are about to do a few days before they make any trades of shares in the company.
That is already the case, top executives trading is publically reported. This is why insider trading often catches relatives of the person in the know. Like the CEO would ask his cousin to make the trades for him.
Came here to say this. Everyone on HN likes to think they understand the nuances of insider trading but the reality is that the law is woefully unclear, highly fact dependent, and constantly changing with each new case. These are wealthy defendants so they can afford to appeal and throw all kinds of legal arguments out there and see what sticks.
It is ambiguous.
The only thing I can say with absolute certainty about insider trading is that anyone who can confidently say XYZ is or isn’t insider trading doesn’t know what they’re talking about.
Not only is it ambiguous, it changes. Insider trading also need to come with an exchange of value. But we’ve been litigating for decades what that means. Is friendship value? Is admiration value? These things actually change over time.
The first one is not really ambiguous: if you work at a hedge fund and received satellite images from your employer trading using this information is insider trading because you were supposed to do your job and do it for your employer. If you are a day trader and bought the images yourself it's ok.
I agree that the second one seems ambiguous and could certainly result in a lawsuit in the shareholders are unhappy.
I don't think the third one is insider trading, the banker had a duty to keep this information confidential, not you and you did not colluded. This looks a bit like the loan to Kodak that got leaked in the press because they had forgot to embargoed it. While it certainly not good looking for employees of the company to trade on this information, what could possibly reproached to outsiders once this news is all over the Internet? Even after the initial tweet had been removed, the news was out their.
What do you think the best predictor is at the moment?
Do you think it is even hypothetically possible that these people aren't comparing notes over golf?
And why is it objectionable? There are enormous information imbalances out there in the market - why be upset about this one? CEOs aren't the biggest fish in the pond.
It's currently a good predictor (socio-economic clustering) but it's less causal (find the right buddy -> immediately become wealthy).
It's objectionable because it introduces yet another mechanism for dramatically increasing inequality and economic stratification while also making capital markets more corrupt and less efficient, which undermines core aspects of our economic system.
> Insider trading is one of those crimes where it is a bit ambiguous as to what the crime is (at least to me). Information travels with some speed and there will always be people with access to better information making better decisions.
Someone explained to me once how ambiguous it can be. Let's say we have CEO and his Friend talking together in speech, in real life:
Friend: "Hey CEO! How are things going at company :)"
CEO: "Oh, things are going well."
Friend: "Oh yeah? Is it looking good?"
CEO: "Yes! ;) Looking really good" winks
Friend buys stocks, Press Release comes out, and Friend holds onto the stock for some quarters.
Here you can see that CEO gave a wink and said things are going really good. He could have not winked, he could have said things are going fine. He can also not communicate this over-optimistically with other people.
_IANAL, but have been working in HF for the past 10 years, with quarterly compliance/regulatory trainings, where I asked numerous questions to lawyers about the subject._
That would not count as insider trading.
For insider trading regulation to kick in, you need to prove the information given carried substantial certainty about the outcome of the trade.
A wink is definitely not substantial certainty. In your situation, the CEO would have to clearly communicate information that led to a positive trade.
If you make insider trading fully legal you eventually won’t really have public markets. That’s OK, many advanced economies don’t really have huge public markets, but that will be a consequence.
> Insider trading is one of those crimes where it is a bit ambiguous as to what the crime is (at least to me).
That is because you appear to have a false understanding of what insider trading is.
> Information travels with some speed and there will always be people with access to better information making better decisions.
That is not a problem at all, as long as the information on question is not sourced from deliberately undisclosed sources within the company itself or within their business partners.
Encouraging investing time and money into interpretation of publicly available data as best as possible to gather information about a company's future prospects is a good thing, because it helps one of the main purposes of public stock markets, which is slapping an as-accurate-as-possible price tag on a company, so investment capital is put to work as efficient as possible. And since it is solely based on public data, this obviously does no undeserved harm to the company's business prospects.
Conversely, encouraging using information that is still kept secret to do this thwarts the future prospects of the company in question, because that information is usually kept secret for business purposes, and if it wasn't secret, deals would not take place. Hence by encouraging using that secret information to take part in price discovery it is effectively encouraged to break confidentiality of that secret information, which is contrary to the interests of the company wanting to make business in the first place.
> We have much better technology these days.
Technology does not have anything to do with this fundamental discussion
> Rather than making trading some sort of crime we should just have a "relevant persons" standard where CEOs and anyone who has close contact with them have to register what they are about to do a few days before they make any trades of shares in the company.
Your argument is self-defeating. Because in order to make officials adhere to the "inform public about intended trades X days before they take place" rule, you MUST make these trades illegal if they happen without this pre-announcement.
Such rules are indeed in place right now, precisely to combat insider trading. This is why people with inside knowledge often try to pass on that knowledge to friends or relatives instead of trading for themselves, which is still illegal insider trading, but much harder to prove.
> It is fundamentally a bit silly have a situation where it is illegal for someone to make best decision given their knowledge.
No, it is not, in case of insider trading. It is fundamentally a bit silly to expect people to participate in a market that does nothing against insider trading, because if you have to assume that regardless of how good your research based on public data is, your counterparty on the market is likely someone with direct access to confidential insider information and will thus make the better trade, any possible trade must be assumed to be a losing trade, hence participation in that market would be a bit silly in the first place, which eventually kills the entire public market because it just leaves those with insider information actually trading.
If you want public markets, you need to limit trades to be only based on public data, otherwise the public will not have any confidence in the fairness of the market and will decide to stay out of it.
> We can safely guess that the professional traders are leveraging every possible edge, fair or not, SEC regulation or not if they think they can get away with it.
Again, you are misunderstanding what is insider trading. Professional traders usually aren't, because trying to leverage any available public data to gain an edge (like the often mentioned satellite imagery that can be bought on the open market by anyone in order to count cars in parking lots of stores or whatever) is not illegal and totally fine within the purpose of the public market as described above. Insider trading originates from people in the company either directly using secret information to trade for themselves or giving trading tips based on that information to outsiders. These could of course be professional traders by accident, but often they're just retail traders, and in the end the nature of those traders is irrelevant for the discussion anyway, because it is about the nature of the trades and how they were informed, not who the traders are.
This is another example of the US backsliding on what it has historically claimed as its competitive advantage: efficient markets, a lack of corruption, and rule of law.
For the people out there claiming that this development is an exclusively Republican project, I offer [1] as a counterexample. In the market right now there are widespread practices that would have been prosecuted a decade ago.
“Alternative data” is a euphemism for “insider trading, but on a computer”. It’s the alpha capture [2] of today.
My first thought was that this couldn't possibly be hedge funds reaping the gains of a Republican government because the hedge business is doing pretty miserably. How could their funds be collapsing and still be insider traders?
But thinking about it further, there is still a category of hedge funds at the absolute top like Lone Pine, Viking, and D1 that are doing exceptionally well. D1 is newer but the others continue to defy the odds year after year while their peers collapse.
And I could probably name 20 funds in total like that. So maybe fewer funds are participating but they are doing it better?
>My first thought was that this couldn't possibly be hedge funds reaping the gains of a Republican government because the hedge business is doing pretty miserably.
This isn't "hedge funds", it is quite clearly executives at companies. The SEC has deemed high-profile execs untouchable.
Although Hanlon's Razor advises considering incompetence[1] before ascribing malice[2], there's always this advice from 1944:
(p.29) 11.b.10: "To lower morale and with it, production, be pleasant to inefficient workers; give them undeserved promotions. Discriminate against efficient workers; complain unjustly about their work."
More that if Avakian and Peikin were explicitly following the OSS guidelines for sabotage, they'd be promoting inefficient enforcement and discouraging efficient enforcement.
Now, I don't believe those two are doing anything of the sort, but a look at the current US ministers certainly reminds me of the soviet chief rabbi joke. I once made fun of Boris Johnson because he videoconferenced with a bookshelf in the background that appeared to have been bought by colour, but he's still doing better than the US Secretary of Education, who didn't even have any books on her background bookshelf...
(Of course, maybe I'm too cynical, and enforcement of insider trading has dropped precipitously because they've found something more important to enforce?)
My view on this is Insider trading is rampant. Trying to squash it, while a good endeavor, is like trying to eradicate cockroaches. There's always more... The most egregious cases will probably still get prosecuted and this still serves as a deterrent, but there will be a few more people walking free.
Note that the enforcement of a lot of regulations and rights _in general_ have been under-enforced under Trump. This Patriot Act episode is an entertaining take on a topic that is very little comical[1].
Capitalists and their politicians have been into "defund the police" long before it was cool. Though only their police such as the SEC, IRS, FTC, EPA, etc.
The problem with the 2008 crash was that it was a systemic flaw spread across many parties (originators, bundlers, derivative underwriters, etc). There wasn’t some cabal of evil laughing traders watching as their grand scheme collapsed.
How about the guys knowingly making loans to people that could not afford them because they knew those loans would be sold so they would not be on the hook for them. How about the guys that hid very shady/risky debt that spread like cancer throughout the system. You can't honestly think that that whole crisis was from a small number of bad actors? People knew to look the other way.
>How about the guys knowingly making loans to people that could not afford them because they knew those loans would be sold so they would not be on the hook for them.
How do you force someone to take a loan? Does the recipient have no responsibility whatsoever, in your opinion?
>How about the guys that hid very shady/risky debt that spread like cancer throughout the system.
What does this even mean? There is "risky debt" all over the entire financial system, all the time. Again, if AIG doesn't know the risk of the financial assets it is purchasing, that is their problem, and it is accountable to its customers. What else are they being paid for?
I guess that’s the distinction between unethical and illegal?
I don’t think it’s illegal to make a loan you know someone can’t pay and then sell said loan to someone who is willing to buy it even when they know it has a high default risk.
> How about the guys knowingly making loans to people that could not afford them because they knew those loans would be sold so they would not be on the hook for them.
Assuming no fraud involved, this wasn’t clearly illegal at the time. You can’t just prosecute people for being bad people; you need a law.
What happened in 2008 was a kind of systematic problem, not illegal stuff by Banking execs ... mostly. A lot of the truly illegal stuff was petty: loan officers falsifying applications, individuals doing same etc..
As for the current let up in prosecutions, it's hard to tell if it's down 'because Trump appointment' or something else.
I mean 'net net' it technically went downward during Obama and may not have spiked during 2010 were it not for crises.
In the same article they indicate overall prosecutions going way up.
It could be that they are not insider trading, but moving on to other crimes.
The ratings agencies that were giving AAA ratings to financial instruments that were built on lies and fraud just because there were very big deserve some scrutiny. It's hard to believe that the entire industry was incompetent and that none of them were colluding with the people offering those instruments.
So yes, the ratings agencies may have been cheating, but they are not remotely 'bankers'.
And it's 'very easy to believe' why they did it - because ratings are their source of income. If they don't play nice, banks go elsewhere.
Similarly 'Gartner' and other such entities: you don't buy their reports, you may not get in the 'magic quadrant'. No 'collusion' is needed, just a brain.
But this misses the question again: what did these banking execs do that was illegal? What should they be prosecuted for?
There's just not much there.
The system relies on Credit - if one part of the system goes down, it can take the rest with it. It's not entirely irrational that one bank goes down - the risk of course is the collateral damage.
The 2008 crises was a systematic failure of lack of oversight, greed, stupidity and some bad actors, mostly not illegal activity.
SEC funding has nearly doubled since 2009, so... no? It makes no sense to imply that the SEC has been "defunded" or weakened by "capitalists" when it now has more power than ever before and a wider regulatory oversight than almost every other federal agency. In fact, I can't think of a better or a more feared market oversight body anywhere else in the world. Same goes for the IRS when it comes to tax evasion.
It's amazing how these types of vague, rhetorical anticapitalist comments here on HN almost consistently end up lacking any substance and add nothing to the conversation.
What's going on is complicated, it isn't surprising that a lot of folks get it wrong.
I don't know much about SEC enforcement, but the IRS has become far less fearsome over time. Again, a somewhat complicated story; there's a good overview here:
As another commenter pointed out, the victim is the public's trust in the financial market. With transactions between private entities, information asymmetry is a normal part of life. But if you want to be able to sell your shares on a public market, the public first needs to trust that you won't screw them over. That trust is a public good worthy of government protection, just like we have government agencies to protecting clean air and fair elections.
I simply disagree. The sale itself is all the information the market needs. I don't care about insider trading and I don't need the government's protection for it.
The victims are literally everybody else in the market. Basically, do you want the markets open to the public, or only to a small cadre of trusted insiders? Allowing insider trading means if you aren't an insider it is a suckers game.
Insider trading is more or less dead. The only people who do it are a very small overlap of the Venn diagram of people who have access to material nonpubluc information and don’t yet know it’s impossible to monetize it. Every hedge fund knows where the line is and they never cross it. I know NPR wants to imply this is because the GOP is soft on crimes like this, but it’s probably more due to these crimes no longer happening.
>The only people who do it are a very small overlap of the Venn diagram of people who have access to material nonpubluc information and don’t yet know it’s impossible to monetize it
Which side is it? That there are less people people who have insider information, or that it's harder to monetize insider information? Unless there's big shift in US corporate culture leading to better information controls across the board, I don't think it's the former. I can't think of anything that'd change the latter, unless HFT/hedge funds found some sort of crystal ball so they can front-run the insiders.
> Which side is it? That there are less people people who have insider information, or that it's harder to monetize insider information?
It’s both. There’s no reason to acquire the information if you cannot monetize it sufficiently. It becomes a liability to have it around. And the whole reason you cannot monetize it sufficiently is that the moment any event occurs, the SEC/FINRA combs through everyone whose trading patterns were suspicious. With the amount of surveillance, you’re almost guaranteed to get caught. There’s no secret meeting in a parking lot. There’s no Signal communications.
I’m not saying there is no criminality in the financial world. Just that this particular crime is so heavily watched and carries such a strong punishment that no rational investor risks it. It mostly ends up being retail guys who got a tip, but didn’t know that the tip was illegal or they just had no clue the depth that the DoJ’s tentacles can reach.
My evidence is that I’m in this world. HFs have departments that read research and then cross checks it to make sure it only includes public information. If somehow a nonpublic piece slips in, they kill the trade.
Hedge funds aren't run like they were in the early 2000s. It's not about individual traders posting PnL, it's about entire teams working together. In the past, individual traders would try and get inside information in order to post good returns. It's not like everyone at the hedge fund worked together to insider trade, that'd be too risky.
As a result of the individual book model dying, inside information isn't worth much. You can't trade on your own, and you can't share it with others.
Moreover, with outflows from discretionary to quantitative strategies, there's not that many hedge funds (by capital at least) that could even do anything with inside information. It's not like if some guy at Bridgewater got a hot merger tip he would even be able to do anything with it.
tl:dr: lots of things have changed, and the industry is no longer conducive to exploiting insider information.
I'm sure it still happens, but at an individual or informal kind of level. It's not an institutionalized accpeted thing like at SAC or Gallion, for example.
Because the information leaked to the public 2 days before. The moment that happened, the information became public, and then it wasn’t insider trading anymore.
Yes the line between "information leak" and "insider trading" sounds thin. Information leak sounds like a convenient excuse. The fact that the price jumped when the announcement was made, not when the leak first happened, shows the leak wasn't certain proof.
"Correlation does not mean causation" has nothing to do with the amount that correlation is the result of causation. It means that the former does not directly imply the latter, you need to add more to your argument than just the correlation argument. There could be other factors at play that were the actual cause of the change. These factors could be the underlying causes for both events, or the events may be completely separate.
The only thing you said was "because X and Y happened at the same time, they seem to be connected". You did not make any other arguments about how X could cause Y. Within the past hour, I went to the bathroom, and also at least one person on earth died. As you can see, to say my bathroom trip caused that persons death is illogical without any other facts or evidence to back it up.
Total SEC enforcement actions are still dancing around their peak, so a hypothesis that the administration has become more friendly to financial misconduct seems disconfirmed.
I would be extremely interested to know what that total is comprised of. If it's, for example, tons of warning letters with nothing further, that would be a great way to look busy doing something while doing nothing.
Looking at the chart in the article, CLEARLY one of those factors made a massive shift right when Trump got elected! Suddenly everyone realized it was bad and they shouldn't do it.
I've been working on a dashboard to track insider transactions at S&P 500 companies, you can check it out at https://www.quiverquant.com/sources/insidertrading