Insider trade on Splunk acquisition?
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An options contract gives you the right to buy or sell a security to a counterparty at a fixed price at any time on or before the expiration date.
As you note, the chances of being able to buy a share from someone on or before Friday for $127 (when the stock was publicly trading below that) was near valueless ($.04). Not anymore!
I'm trying to understand why a counterparty would enter into an arrangement where a stock price change obligates them to financial liability like this. Presumably there's some upside if the stock price goes the other way, but it's unclear who the $ would come from in that case.
Also: Who originates options? When someone buys an option, is it the brokerage who collects the fees? Is the counterparty already involved at that point?
I can sell call options 10% out of the money each week and make some nice cash. If my plan was to hold the stock long term, there's no downside risk because if the stock goes down, I get to keep the cash (premium) from selling the calls. If it goes sideways or slightly up I get to keep it as well.
The only "downside" is it goes up >10% in which case i've made that 10% + premium, but I've now had my stock taken away from me.
In this case, I lose out on an additional 10% in upside because it went up 20% overnight.
Loss aversion and all that, but it feels like a reasonable strategy where you still come out ahead in the worst case. In the typical case, you can continue to collect those pennies.
Top notch comment, considering options trading is often described as "picking up pennies in front of a steamroller."
> Loss aversion and all that, but it feels like a reasonable strategy where you still come out ahead in the worst case
You don't come out ahead in the worst case – the option you wrote can settle deep ITM and you are compelled to sell a stock at a loss. Worst case you could lose a major chunk of change.
But you were offering it based on the market price when you offered it. The "loss" is merely one of opportunity, you're not actually losing any value you had when you sold the option, right?
On the other hand, if the price shoots up to, say, $85, I'm still obligated to sell them at $50. Since I bought them at $10, I've still made $4001 profit, but I'm still dissatisfied because I would have made $7500 if I hadn't sold the call option.
What you're describing is what happens if I don't already own those shares and the price skyrockets. If the counterparty exercises their $50 option when the current price is $85, then yes, I'm obligated to buy the shares at market price and sell for a total loss of ($STRIKE_PRICE * 100) - $5000 - 1.
The price of SPLK had no reason to jump to or beyond $127 without some catalyst event so the options were almost worthless. But with the acquisition, the stock had a catalyst and with the share price jumping to $145, those options gained a crap load of intrinsic value (basically the difference of $145 - $127).
Now either the purchaser got really really lucky or had insider information that the acquisition was going to happen. The latter seems much more likely.
Most subtle Cisco joke in the whole thread. Hat tip.
but if they only tried to keep up with the delta then they might not have bought enough shares and have some losses right now, on that one position
they can take losses its a risk
To make the numbers simple, imagine a stock trades at $10/share. If someone came to you and said: how much would you be willing to pay to have an option to buy the stock for $100/share? The correct answer is: it depends. If it’s the right to buy the stock for $100/share at any point over the next 10 years then that’s worth more than to buy the stock at $100/share in the next day. A stock trading at $10 is unlikely to jump to $100 in a day so the option to by it for $100 is not worth much. It could happen, so it’s worth something. But it’s unlikely. So, again to make the numbers simple, let’s say it’s worth $0.01/option to buy a stock at $100 in the next day when it’s trading at $10 today.
Now imagine it’s the next day and the company with the $10 stock discovers the cure for cancer or invents time travel or perfects cold fusion. News breaks and now it’s trading at $1,000 per share. Now how much is the right to buy the stock at $100 per share worth? The answer is going to be something really close to, but maybe a small discount from, $1,000 (current value of the stock) - $100 (how much you pay based on the option) = $900. So what was worth $0.01 yesterday is worth $900 today.
Let’s say you have $10,000 to invest. If you know in advance the news is going to break you can do two things to (probably illegally) try and profit from it.
1. Buy 1,000 shares of the stock for $10/share. 2. Buy 1,000,000 options to buy the stock for $100/share tomorrow with each option costing $0.01.
With strategy 1 you spend $10,000 to buy something that, after the news breaks, is worth $1,000,000. Not bad. But with strategy 2 you spend $10,000 to buy something that’s worth $900,000,000 after the news breaks.
In both cases you’re likely to at least be investigated. And strategy 2 seems especially suspicious because the risk is so high and the non-illegal reasons for doing it are so few and far between. Very few reasons you’d buy a bunch of call options that only pay off if something causes a stock to move dramatically in 24 hours.
Finally, while short-dated, out-of-the-money call options are not something many if anyone should be playing with, they’re just a different flavor of something very familiar. To put it in context a lot of HN readers will understand more intuitively: a call option is what you often receive when you get equity in a startup. It’s the right to purchase shares at a price (strike price) before a certain amount of time (typically 10 years).
But why are they then legal to sell? It almost seems like someone wants to be able to sell them, but when they lose the bet they want to revert it. Free money if you're on the correct side.
Things are legal until there is a law or ruling that makes them illegal
What's illegal is to use insider info to make the decision to do the trade. Did the entity making this trade use insider info? We don't know. If they did not, nothing wrong with the trade.
Now, the circumstances are such that this reeks of insider info. Nobody sane would have done that trade otherwise. So hopefully the SEC will investigate fully. If it turns out the trader really did not have any connection to either of these companies and had no knowledge of the acquisition and simply made the luckiest bet of their life.. then that's fine.
But my point is that there were people on the other side more than willing to take that person's money. If "no one sane" would do that trade, why let the other side be able to profit of it until suddenly it wasn't free money? Why shouldn't the other side carry any risk?
What else would you propose?
Designing an algorithm that prevents people from offering or taking bad trades would require a reliable crystal ball. Solving the halting problem sounds easier.
It’s less obvious with stocks because there’s a pretty streamlined system for taking delivery of the stock ownership but with physical goods or real estate sometimes actually changing ownership triggers a lot of regulatory or tax or process things.
For example, with real estate if you actually buy it you’ll need at minimum to get insurance to cover if any trespassers or workers get injured on the property. Lots of paperwork to transfer the title/deed, and you might be on the hook to help sort out future title / deed / survey errors. But if you never own it you save the headache of all these things.
For buying commodities you need a safe, regulated warehouse/tank to store it, handle all the ohysical logistics, etc.
By buying and selling the right to purchase the things you can delay the actual purchase until you find someone who can and wants to actually deal with the ownership of the thing.
The seller is basically stealing money from a "sucker", until they suddenly aren't. No value in allowing those kind if bets, then. Where the seller either wins or claim fraud. Very one sided.
If this was e.g. 1 million different buyers of 1 option each instead of 1 buyer of 1 million options this would be a non-story.
Let's take a boring case -- that $10 stock is NOT going to $1000 tomorrow, they're not finding a cure for cancer, etc. So 99.9999999/100, if you sold someone the option for $.01, it's going to expire worthless tomorrow. You have 1M shares, you sell the call options for 1M * $.01 = $10,000.
You let some other people place bets on a thing that might (but probably won't) happen, and you get $10,000 just for owning the stock. It's like an interest payment (with some risk).
If the thing DOES happen, you are taking a risk that you'll have to sell your stock for slightly less than if you'd held it, so you're giving up some potential gains.
But in the long run, this is all priced out and balances out (in theory, in an efficient market). You get $10,000 in "interest" but are taking the risk that you might lose some upside in a black swan event, and the buyers are paying a nominal amount to take a bet on the other side. They might have spent $10k in order to possibly make a $billion -- those are risks that some people price and want to take (like a lottery).
While a hedged out of money option is commonplace. various payoffs you can create with options is mind boggling.
So a scenario I'm curious about:
Say you're, like, an employee at DataDog, and you're involved in a long-term M&A discussion with Cisco that you know is competitive (I've had the pleasure of witnessing one of these at Arbor Networks). Things are looking great, you've picked up a bunch of strong signals that Cisco is definitely going to make a move, and then: the talks fall apart.
Knowing Cisco, you immediately reach the logical conclusion that they're about to acquire your biggest competitor.
You have no fiduciary duty to Splunk whatsoever. Cisco is, if anything, hostile. Buying Splunk options that are valuable only if Cisco acquires doesn't impact DataDog at all.
Have you violated insider trading laws if you buy the options?
Or Matt Levine on the same case: https://archive.ph/5Dlmw
In my hypo and his, the origin of the private information I've acquired is still business my employer has conducted, so there's a better-than-baseline probability that the SEC would see this as misappropriation --- even if my employer wasn't directly going to trade on this, or if it was hard to trace any harm to my employer, it's still potentially not OK for me to profit from it.
In classical insider trading, the victims are the investors in the M&A target. I'm misappropriating MNPI about the target, so I'm essentially defrauding the target's investors.
In the "shadow" case, I think it's a harder argument to make. If I work for a potential Cisco M&A target that falls through (as per the GPP), I've got, MNPI about my org, and probably MNPI relating to Cisco. Can I defraud Splunk's investors with that?
Every trade has a counterpart.
¯\_(ツ)_/¯
I think a lawyer would advise that that trade would come with a ton of risk. But the law isn’t clear. Generally, the SEC’s goal is to make sure markets are “fair.” What makes a market fair is hard to define.
If you do a ton of work to launch satellites to fly over Walmart parking lots and then model the correlation of how full they are to what the company’s next earnings will be: that seems like you worked hard and earned an edge you can trade on without getting in trouble. Feels like anyone has a theoretically equal opportunity to do the same work you did and get the same trading edge. That feels fair.
Your hypothetical feels less fair. Is it unfair? Maybe? So unfair that it’d be prosecuted? Probably depends on a number of things, including how much you made on the trade. At a minimum it’s an area of unsettled law. And you would almost certainly be in for serious scrutiny and a legal fight.
Supposedly one idea for Google’s business model early on was that they should use search query data to trade equities. After they researched it they concluded it would be considered insider trading. Though it’s hard to distinguish from overhearing something on the train, which (not legal advice) generally has not been. Think the difference at some level is scale and intention. And, I’d guess, if you made it your business to ride the Acela every day between Greenwich and NYC, bought special hearing aides that let you better eavesdrop on conversations, and made significant profits trading on the information then you’d be more likely to be successfully prosecuted.
But… how is that different from flying satellites over Walmart parking lots?
¯\_(ツ)_/¯
Sometimes the law is intentionally a bit unclear. Usually in areas like this where you care about a general concept of fairness and want some caution and buffer at the margins.
Presumably there's a contract between Walmart and p&g that they won't trade in each other's stocks, specifically to prevent this?
It's funny how often "we'll trade equities on the information we generate as a byproduct" comes up --- always briefly --- as a tech company business model. Like, I've non-ironically been involved in companies that had that premise, and then "real" business always swamps the "we'll trade on it" intentions.
options change price considerably depending on the length of the contract, this required surgical precision.
I don't know about the law, but where I work insider trading policies also applies to vendor and supplier stocks. Trading on that info would cost me a job, at the least.
The only thing I would change is "perfects cold fusion" to "discovers cold fusion" :)
260 options is WSB lotto territory. At $4 each, that’s a thousand dollar bet. We’re not exactly talking big money here.
Open Interest is 420 contracts, this is a max number of options someone can hold (for that strike and expiry). See the first line on the first screenshot, just below "Historical Volume / OI". Nobody could hold more than that much contract.
Edit: The total contracts is 127, so it gives 127 x $18 x 100 ~ $230'000 profit. (Seems like the post on Twitter is missing x10 factor.)
Even if it’s legit, this trader is going to be spending a lot of time giving depositions over the next few months.
Contrast this with Stephen Buyer who's going to trial and may well end up in jail for a piddly few $100k.
It's absolutely mostly the poor who go to jail except a few fall guys - it's very apparent.
That's class privilege for you guys, and it has been like this for hundreds of years in most societies but only americans seem to "miss" this or whatever the hell is going on.
Just as here in the EU, fraud in elite circles shuffles billions every day while everyone focuses on petty crime and sensational cases.
Wars have killed millions for resource political gains and entire economies have been fucked over to benefit tiny circles of the richest - and none of these people have ever gone to jail.
The control that the uppermost echelons has over the flow of information in this new social cybernetic system we've all been forced into is so efficient, it's almost unbelievable lol.
Part of it is justifiable. The value of a prison is threefold. It's a punishment, and in that sense it shouldn't be exclusive to the poor. But it's also a way to separate violent criminals from the rest of the population, reducing further violence. A financial criminal can just be denied access to the industry to achieve that end. And it's an opportunity for rehabilitation, but that doesn't seem to be a priority in the US anyway.
I wonder if that's actually true for a normal person, or if automated analytics would be looking at the relative value of your portfolio rather than just looking for the biggest wins in absolute terms.
Because otherwise lots of people would've taken this sort of calculated risk already.
So erm, yeah, don’t do this.
Thinking is: „Who the hell would make such a trade if he doesn’t have some information, let’s do the same“
See the first photo in the tweet, the top left chart (45-day volume on the SPLK 127 C 09/22/2023 options) shows a volume of about 260 options was bought. The second photo confirms a volume of 260 (see "volume" column, first row).
Options are for 100 shares. So 260 options times 100 shares times $0.04 equals $1,040. Meaning the insider trader turned $1,040 into $475,000.
(Edited my math - an option is $4 as it's for 100 shares - thanks pc86.)
That's not a very efficient way to stop information leaks. It's not like ones and zeroes are delivered through open doors..
It will work against Big Bad Wolves, especially if your house is made of bricks.
Not doing that would be Security Malpractice.
But yes all these steps should be necessary to minimize risks.
Is that insider trading?
I don't think so, it happened publicly, you weren't privvy to classified details. I would go for it if I were in that scenario.
Everything you listed is publicly accessible knowledge (there is an interesting conversation over the fact that a poor person is unlikely to have the available means to attain this information) and I think should be fair game. But I really have not done the legal research to confidently give you a “Yes” and willfully will exit so I don’t get some SEC agent knocking on my door.
This was old enough to be the stuff of office legends fifteen years ago. (Also, flying drones to thermally image petroleum tankers to infer their levels.)
But if it's that easy that means other people are already doing it and you probably can't make any money.
Plenty of companies will help you monitor parking lots too: https://orbitalinsight.com/geospatial-solutions/financial-se..., https://rsmetrics.com/asset-tracker/
The general term for this stuff is "alternative data".
Thinking is: „Who the hell would make such a trade if he doesn’t have some information, let’s do the same“
On the condition that you acted solely on information that was already public, or something that happened in a public place that you happened to witness as a bystander…
No, that is not usually considered insider trading.
Not a lawyer, not advice.
IE "someone bought a lottery ticket and won" - interesting to know if they play the lottery every other day (and don't usually win?)
Congresspersons separately aren't allowed to trade on things they learn from their job- that was banned in 2012 under the STOCK act.
https://campaignlegal.org/update/part-2-stock-act-failed-eff...
I do think that something like the Ban Congressional Stock Trading Act (everything in a blind trust), or its even more draconian (no blind trusts, just sell!) Ban Stock Trading for Government Officials Act will probably pass, eventually. Those are general markers for where we are going. But to just say "It's not illegal if you are a Member of Congress" is flat wrong and encourages a level of cynicism that makes it harder to actually fix the problems we face today.
Insider trading off of classified or whatever info they get from their senate/congress job - not illegal (though imo it should be illegal). (Edit: as mandevil points out, strictly speaking illegal, but largely uneforceable/unenforced)
Insider trading off of info they got from their buddy at XYZ place who knew about something ahead of time, unrelated to their senate/congress job - still illegal, same as for other people.
> Trades executed by lawmakers or their families must be disclosed within 45 days of execution
Is probably an issue (it's it's actually insider trading).
People do track it, though:
The public ought to benefit from the same insights and info.
And if a trade disclosure would be considered a threat to national security for some reason, you don’t make the trade.
Especially if the person doing the trade is found to be employed by (or closely related to someone employed by) Cisco or Splunk or one of their banks.
But, to start, the SEC will just come knocking and asking questions. If you have a good explanation then they'll go away. But if you don't then they'll keep digging, get warrants, etc.
If it's some random hedge fund that makes these bets all the time then the SEC will probably go away. If it's a broke old lady who opened her brokerage account a week ago then it's pretty clear what's going on, and they'll have the tools they need to turn the screws and get to the bottom of it. And if it's someone whose wife works in Cisco M&A then it'll be pretty open and shut because these kinds of mergers keep track of who had access to what info, for exactly this reason.
A lot of people/organizations bet in the millions.
The listed option price is the price per share, and a standard option contract is 100 shares of exposure.
The screenshots seem to show a total traded volume for yesterday of 260 contracts (26,000 shares), way smaller than what was suggested.
Furthermore, nothing makes it clear that these were all the same person. And the open interest went down that day so at least some of this volume was buying to cover.
There is no special immunity for insider trading for Congress. https://www.everycrsreport.com/files/20170412_RS21127_36174d...
Yes.
You are only able to trade share's during specific windows of time typically 1 week after earnings are released.
Additionally virtually every company I've known has explicit policies stating that you cannot buy/sell any derivatives related to the company stock (which is a shame since buying put options is a legitimate way to insure your compensation).
Further more, even these rules are only this lax for non-executive or other high level employees. If you're higher up in the company you have much more access to non-public material information. The solution to this is usually to set up a 10b5-1 that automatically liquidates shares based on a schedule approved by the board.
In regards to the "previously" question. I wouldn't worry about legitimate trades, but if you are trading based on insider information and looking to gain a lot of money, then trading would, by definition, be "insider trading"
As a practical matter, you can set up a 10b5-1 to get around this restriction if all you want to do is regularly sell your RSUs when you get them or at certain fixed periods.
Just having RSUs doesn't mean that you are trade restricted. That depends on your job function and you can confirm with HR (I had to). In addition, like you say, there are further restrictions if you are sufficiently high up.
Yeah, some companies have restrictions on derivatives, most have restrictions on shorting.
AFAIU, the use of material non-public information always qualifies as insider trading. It does not matter how you got it, and it does not even matter if you work at the company.
See https://www.investopedia.com/terms/m/materialinsiderinformat...
If you develop the info yourself (say, monitoring how full parking lots are at a store to predict earnings), that is fine.
Insider trading is about theft of information, not fairness.
Well, it sort of does. In fact, that's almost all that matters.
Insider trading is all about obligations. If someone who had the obligation to keep the info secret gave it to you and then you went and traded on it, then yes, you're breaking the law.
But if, say, you figure it out by accidentally stumbling on a draft Splunk web page that has a Cisco copyright buried in the code, you don't have any obligation to not trade on that.
It's the same information but the only thing that's different is how you got it. The company and its shareholders are the ones who are harmed by insider trading, so if you're entrusted with the info and trade then you're basically breaching your duty to the company (or the chain of people who shared the info with you). But if the company fucks up and leaks the info then you don't have any obligation to not use it.
> Material nonpublic information is data relating to a company that has not been made public but could have an impact on its share price. It is against the law for holders of nonpublic material information to use the information to their advantage in trading stocks.
Edit: or would a leak on a webpage be considered “public”? I recall a podcast where they said that if you saw a company’s factory blow up while in an airplane, it would be illegal (insider trading) to trade on this information until the news was announced publicly.
The US and Europe differ on how exactly this should work.
In Europe, your view is correct. In the US, it's about obligation. You can trade on material non-public info if you discovered it on your own without doing anything illegal.
How does this square with using satellite analysis to predict a company's retail volume?
https://newsroom.haas.berkeley.edu/how-hedge-funds-use-satel...
This person spent $22,000 on buying the options. Unless you are a person who regularly trades this kind of money, the SEC will ask why you felt so confident in it that you made that bet.
If you're a regular "low level Splunk or Cisco employee" who honestly has no access to insider information and you honestly just have a "hunch," you're probably not making a bet at the level that the SEC cares about.
> you just heard through the grapevine that it's happening
Is that "grapevine" public? If not, it is by definition material non-public information.
In general in finance if you think you've found some clever exploit in the system that you're surprised no one else is taking advantage of, it's a good idea to double and triple check that it is in fact a legal exploit. Especially if you stand to gain millions off of something that seems easy to do.
It is like a casino, except if you win the jackpot you get arrested. Because we run our economy under the law that requires stock prices to be set by ignorant people.
Example: You watch the front door of an office building. From seeing who walks in, you ascertain with 99% probability that companies X and Y are working on some kind of big deal. If you're just a random person with no relationship to those companies, you can trade on this information.
(Not legal advice! Don't do this unless you are sure it is OK! Which I am not!)
> Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.
If you have no fiduciary duty or other relationship of trust and confidence, it’s not insider trading. So to my understanding, if you, say, overheard two execs chatting about this in an airport lounge you’d be free to trade on it.
Note: this only applies to the US! Different countries may define things differently.
[1]: https://www.investor.gov/introduction-investing/investing-ba...
Maybe this whale was tracking tail numbers, drove down to the executive airport, and saw that Cisco's chief M&A guy had a huge grin on his face as he stepped onto the plane.
(Okay, I doubt that highly, but it is a scenario)
The real trouble with 'maybe they were legit outsiders' is the options expired specifically today, which means you need to know _when the announcement_ is to profit.
For those who don't know, they're both part of the same metro area (Bay Area) but they're 50 miles apart, anywhere from 1 to 2 hours apart depending on traffic.
For example, a Printer for Business Week and a Stock Broker traded on pre-publication information and were convicted of insider trading.
https://corporateinsiderstrading.wordpress.com/2012/02/01/bu...
They traded on information that was non-public at the time of the trade. Why shouldn't that be treated exactly as trading on news of this merger before it was announced? (The merger was eventually going to be known to the public as well, right?)
0 - https://www.investor.gov/introduction-investing/investing-ba...
Cisco is not allowed to use inside information about Splunk to make the acquisition either. So, if someone did the same analysis that Cisco did they could have drawn the same conclusion.
If this trader has a solid history of making many wild option contracts including many that didn't pay off, leading to average returns, then that's a strong case that this was random.
About the merger, but not about the exact date that it would be announced.
The question was, any way this could be legit.
Yes, people try to follow private plane transponders of bankers and corp executives to/from corporate headquarters. This is harder for 2 SV companies, it isnt like the plane is flying to some rural HQ.
IANAL, but I'd guess that betting on an acquisition based on public data about private plane routes would make this trade legal IFF that happened.
Wouldn't be surprised if this is done by a sibling or an uncle in another country.
The option chain I have shows regular volume, with open interest to be ~420 contracts.
Thinking is: „Who the hell would make such a trade if he doesn’t have some information, let’s do the same“
1. Would that still fall under insider trading even if the information was accidentally heard, and even if I wasn't 100% sure of its accuracy?
2. If I had no clear connection to the company how would it be proven that I was trading on insider information? Surely it's not enough just to say the trade was statistically unlikely, or is it?
See 17 CFR § 240.10b5-1 "Trading “on the basis of” material nonpublic information in insider trading cases", particularly section (b) "Awareness of material nonpublic information."
if you’re not affiliated with the company and simply overhear and trade, make enough to retain a lawyer real quick
If someone anonymously posts on Twitter that Splunk is going to get acquired by Cisco and you immediately buy options, and you don’t know who this Twitter account is, then it’s speculation. Also it’s no longer non-public information if someone posts it on Twitter.
Yes, if you trade on public information, then it's not material non public information.
“insiders must be breaching a fiduciary duty owed to their corporation when they trade on or tip confidential corporate information. This stipulation almost always means that an insider cannot trade on such information and cannot tip others about it if the insider stands to gain by doing so. https://sloanreview.mit.edu/article/when-is-it-legal-to-trad...
In the case where an unrelated outsider overhears the information that’s public disclosure. And the information no longer needs to be treated by random people as non-public.
But traditionally in the US insider trading is not about market fairness, it’s about not stealing from shareholders. So if you have no obligation to the company or it’s shareholders you aren’t an insider. The phrase is “breach of a fiduciary duty or other relationship of trust and confidence”.
A fiance is still close enough that they are captured by lots of regulation, because collusion/cooperation between partners is so common.
This is the stuff of tawdry crime thrillers, but it's certainly not so far out of the realm of possibility that the SEC can just ignore it.
But it’s not strictly about insider trading. Pelosi (or trump or Pelosis’ husband) are not traditionally insiders. The testimony they receive is by its nature public. That we’ve allowed lots of things that shouldn’t be secret doesn’t change that. That elected officials can be corrupted by their power isn’t an insider trading issue, it’s a corruption one.
The common belief is that insider trading laws are about having data that the market doesn't know. In the US that's just not the basis for the law. In the US there is no expectation that everyone has the same information when trading. The expectation is that people who have a duty to the shareholders are not trading on any non public material information. If you don't have a duty to the shareholders, it doesn't matter how you trade.
Is that the appropriate standard to hold congress people to? I don't know, personally i think, no. But its not obvious that its incorrect from a legal point of view. What fiduciary duty does Nancy Pelosi have to some fund her husband owns? I'm good with a definition that says "once you become a congress person you have fiduciary duty to everyone" but thats not the law now.
The case for those wondering.
See also: I am not allowed to use robinhood at all because their referral program can reward you with a restricted security. Nobody was grandfathered and every RH user at my firm was told to xfer out or find a new job. I also can't use any roboadvisor.
For us peons, independence is a serious matter. It's just the rich and powerful that get to flaunt it.
most of the Stewart case was about her actions post the tip. If she’d had just said “my broker told me to sell” she’d likely be good to go (who knows). But she didn’t. She obscured and made it obvious with her actions that she was trying to steal from other shareholders (by acting on information she should not have).
Isn't that basically just scamming? I can tell you I have a box full of gold, sell it to you, and then it's not. You think this is ok?
> Oh, but I didn't pay employees for insider information. I merely overheard it at the bus stop!
Granted, if this really is how someone learns of an acquisition it would be unlikely to get proven in court, and unlikely you'd even get accused as someone with no ties to the company.
That all being said, the clear message from our government is that insider trading is okay. Our politicians do it every week. So don't feel bad about it if you do get a lucky tip.
In this case though you’d probably have a good defense to those charges. It’s possible they’d interview you and look into it more and see this plainly before bringing those charges. If they did though, even with a good defense, it’s going to be disruptive to your life and finances.
The fact they were speaking about it in public and you have no connection to them makes it plausible for you to think that what you heard was public information. The onus is on them to protect sensitive information like this so they could actually face some problems. It’s very much going to vary by all the people involved with the investigation and what they want to do with it.
You do this for months (hopefully without your M&A 'friend' swapping jobs or going WFH) before you shoulder surf that a publicly traded company is being acquired at some massive premium and spear the whale for low-DTE calls within 2S.D. of your normal range.
If you get investigated you can just say that you regularly take these kinds of punts for fun. You've got a record to prove it. You've got no contact with people in these positions, you can provide your entire social calendar and contact list and be probably many steps removed.
FWIW I keep all my money in some individual stocks and index funds. I just think this kind of hypothetical is a pretty fun situation to try to optimize for.
If this guy had bought these calls last week (at same DTE) all he would have accomplished is donating $22k to some bank or hedge fund somewhere.
The amount of HNers attempting to defend illegal trades like this is mind-boggling. Those in Congress should also be investigated over their suspiciously timed trades and as long as they are working in Congress, they should not be doing such trading at all.
There are no excuses for it.
[0] https://www.nbcnews.com/politics/politics-news/ex-lawmaker-c...
The SEC could still sue you and turn your life upside down by investigating every aspect of your life to try to find the connection that gave you that information, but if they can’t come up with the proof then eventually you would be fine.
I believe someone in Europe overheard info on a train and was successfully prosecuted. The US has not historically prosecuted trading on inside information that wasn't obtained illegally
So if you research that's fine. If you overhear something that might be fine (I don't think anyone has been seriously convicted yet but I could be wrong)
It can't be enough to say the trade was statistically unlikely because your independent research might legitimately let you make an unlikely trade. This particular trade was very unlikely though.
It is fun to think about what the most minimal case could be. Ask the CEO what he thinks of revenue next quarter. If he smiles, starts to speak, then looks at the CFO and realizes he should stop, is that insider information? It probably is by some people's definition and he communicated no words.
To me, even if they used information they had and we didn't, I don't see who the "victim" of this crime would be. It truly sounds like a "but it's unfair" argument and I'd really like to know why I'm wrong here.
Thanks in advance
I also think it’s weird we don’t apply this consistently. I can buy many assets with “non public information”, just not those the SEC regulates. So it’s not really about markets at all, but specifically about fairness for shareholders (or something by like that?)
but in terms of market efficiency, trading on inside information actually does move the market in the correct direction, toward its new market clearing price, so trading on inside information generally makes the market more efficient: if you are trading based on statistical properties of the market, "a diversified portfolio across market sectors", having the prices be corrected will give you a more balanced portfolio.
I'm not an expert on the intricacies of the regulations around acquisitions, but Cisco, big company, deciding to acquire Splunk, smaller company, is a very material fact about Splunk. Acquirers are only allowed to acquire a certain number of shares before making a public tender offer, because shareholders are entitled to know this information.
answering GPs question "who is harmed", well if you collect profits on one big trade, they came from somewhere, they came from people who traded with you without having the information you have, a trade which you enticed by making your lowball offer which only appeared like a good offer because they were in the dark. If such trades were legal, then insiders would corner the entire market for shares before any announcement was ever made.
Whoever sold it wouldn't have sold it if they knew a merger would be announced the very next day (or wouldn't have sold it at that price, to be more accurate).
Who is the victim?
The person who bought the stock you knew was worthless or sold you the stock you knew was gold.
Why is insider trading a crime?
It's an unmanageable market advantage, if we didn't disallow it then people wouldn't play. The people who make the rules benefit from people playing.
The stock market would cease to be an effective tool for raising capital.
It would be more akin to the crypto market where there are no such rules about insider trading and everything is pumped and dumped via influencers and degens acting on insider tips.
So the "victim" here is society. People can use their connections to get an advantage over others. They can turn that money and those connections into an even larger advantage. Then their relatives can inherit that and continue that. And if the system is blatantly rigged, why would normal investors want to be involved in the market?
Again, it depends on your values.
The person that sold the options. They were offering cheap insurance for a very unlikely event.
In some ways a crime like this is worse for not harming any particular person directly. First, because people often convince themselves that not having a clear victim means it's victimless and therefore okay, which is where your line of thought seems to be going. Second, because the lack of a clear victim means such crimes can go relatively unnoticed, unmitigated, and under-punished.
IMO, white collar crimes (and not just the explicitly illegal ones) are an insidious disease on society. The indirectness of the harm serves as a kind of camouflage against peoples moral judgement, but that's a failure of judgement. It's like falling for that trick that kids do where they spread their food all over their plate so it looks like they ate more of it.
- If I have $1000 I might choose to spend $2 for a gambling. - If the trader have $10M already, it might be reasonable for him/her to spend $20k gambling on some rumors.
This guy could be someone who is already rich.
And a suspicious trade itself is not enough evidence, there needs to be evidence of an inside information conduit to make the case.
I'm not take sides on the suspiciousness of the trade, I'm pointing out what the language of the evidence should look like to raise suspicion.