See, e.g.
https://www.law.cornell.edu/wex/misappropriation_theory_of_i...
The link you referenced also clarifies this point, but it is different from what is written in your comment.
Note: this doesn't change the fact that the answer in this particular case is no, it's not insider trading. You are, as parent mentioned, just the first to know the news.
Someone receiving information from an insider needs be independent of personal, financial, and quid pro quo relationships. So a random person that happens to sit next to a CEO on an airplane can trade on whatever they hear. The CEO’s mistress sitting on the other side of them can’t.
This warmed my heart greatly.
I am under the impression that this would also be illegal, because trading on the basis of MNPI is itself illegal, irrespective of insider/outsider status.
But then the passenger could claim that they did not the person next to them was Elon Musk, and that when Elon said over the phone "whoever shorts Tesla stock now will become a billionaire next month" they thought it was some random guy giving his 2c on the trade.
[1] https://www.law.cornell.edu/wex/misappropriation_theory_of_i...
> Before U.S. v. O’Hagan, 521 U.S. 642 (1997), individuals could only be liable for insider trading under the classical theory of insider trading. In U.S. v. O’Hagan, the U.S. Supreme Court faced a scenario where a partner at a large law firm purchased stock futures in a company conducting a tender offer based on inside information that he gleaned from other partners at the firm working on the deal. Although the partner had no fiduciary duty to the companies in whose stock he traded, the Supreme Court found him liable under Rule 10 b-5 on the grounds that he used confidential information to trade securities. The Court reasoned that such insider trading is fraudulent because it is akin to embezzlement; that is, the owner of the confidential information has exclusive use of such information, and the trader misappropriates that information by trading on it and not disclosing the use of the information to the owner of the information.
Where the ‘theft’ line of reasoning is an issue for unrelated 3rd parties is hacking: https://www.justice.gov/usao-edny/pr/former-hedge-fund-manag...
"I heard a rumour that their defect rate is very high for this new product."
Information that isn't meant to be public might still send up circulating sure to mistakes etc. How would you determine whether trading based on it would be legal or not?
Hearing and trading on a specific statement by an insider at a public company, as an outsider, is insider trading. It's not that complicated
You can be fully versed in insider trading law, receive some information that you reasonably assume isn't protected, trade on it, and that's not insider trading.
If that weren't the case, every single person who traded a stock after some MNPI was inadvertently broadcast/published would be guilty of insider trading.
"yes" in Europe, "no" in the US
https://en.wikipedia.org/wiki/Insider_trading#Legal_differen...
> The principle is that it is illegal to trade on the basis of market-sensitive information that is not generally known. This is a much broader scope than under U.S. law. The key differences from U.S. law are that no relationship to either the issuer of the security or the tipster is required; all that is required is that the guilty party traded (or caused trading) whilst having inside information
I think this is wrong as well. Suppose you are a independent technician repairing cars. Over time you notice, that, say BMW car quality used to be good but has gone to shit. That's not public information, but you would be allowed to short BMW stock in the hopes that, once public catches on, their share price will tank.
In fact half the point of stock trading if for you to do research, including your own investigation and testing. And then use that as an advantage. In the process you are bringing the price close to it's true value.
P.S. nothing against BMW, just an example.
The gp's wording is a little confusing but he's just trying to explain the transitive logic of non-public information transferring from a "true insider" to an outsider is also "insider trading" and thus illegal. Think of it as the provenance of information coming from an insider.
E.g. Martha Stewart is an "outsider" and not an insider of drug company ImClone but she was found guilty of insider trading because she did get confidential information from insiders at the Merrill Lynch brokerage that handled stock trades for the ImClone CEO: https://www.sec.gov/news/press/2003-69.htm
Your scenario of a mechanic repairing cars, or somebody counting the number of cars in various Walmart parking lots, or a hacker that discovers a serious website vulnerability that may cause embarrassment and stock price drop ... none of those situations have a corporate insider in that information disclosure loop.
Minor correction: she was not convicted of insider trading. That charge was dismissed. She was only convicted of lying to investigators.
The judge dismissed a charge of "securities fraud", which claimed that she had defrauded investors in her own company by making false statements to the public.
The jury convicted her of "false statements", obstruction, and conspiracy.
Can Apple buy stock in a chip manufacture before they sign a deal with them?
Can they short them before not renewing a contract?
Another way of asking, is trading other companies based on insider knowledge from your company legal?
#3 is a general case of specific cases 1 & 2.
I don’t think 3 can be a yes if 2&3 are a no.
I was trying to avoid the use of "insider," because people tend to assume that means employees or directors, but that is not the case. Outside organizations who have, as an example, signed an NDA with the organization may learn of material non-public information, and trading on that could constitute insider trading.
Right, but information available to those with a confidentiality obligation can still be traded on if acquired legally. That's the crucial point. It's not enough for it to be non-public and material, you must also be in breach of a fiduciary duty (or acting in concert with somebody who is). For example, if a Boeing CEO was at a coffee shop discussing an upcoming acquisition at the table next to you, you'd be able to trade on it, even though it was confidential information not available to the general public and obviously material to Boeing's stock price.
The scenario you mentioned is generally understood to be permissible, but it's not exactly clear to me why. Perhaps that the information became "public" (whether intentional or not) when discussing it in a public forum such as a coffee shop?
IANAL, but if she traded a picosecond after tweeting: no. If she has zillions of followers and traded a year later: yes, because ’the public’ could be aware of the content of the tweet. A judge will have to decide on in-betweens. When doing that they likely will take into account how open Twitter/X is.
> If I saw the tweet and trade is that legal?
Again, IANAL, but I would think so, if she has ‘enough’ followers.
Regardless of when you learned it, the quality of BMW's cars (in this example) became public information when they started selling them to the public.
Now, however, if an internal employee told the technician that BMW had removed all QA checks from their line, and (s)he should expect quality to fall precipitously in the years ahead, that would be different.
https://www.compliancebuilding.com/2014/02/06/working-on-the...
Roadroad workers notice a bunch of visitors in suits, boss asked them to put together an inventory of property.
So they thought the company was going to be sold and profited on it.
SEC charged them, courts found them not guilty of insider trading.
Now, if you learned from someone inside that they were going to do a recall but had not announced it yet, on the other hand...
That being said, I am sure that insider trading is widespread (e.g. above example). The thing is that is it not easy to detect unless you are already on the radar.
"Non public" usually means an information that's internal to the company, not necessarily something that can't be gathered independently
Google's menu for the week in their offices is "non public" but not material information
https://www.bloomberg.com/opinion/articles/2023-11-02/the-ba...
(Journalism Section)
Here’s the scenario. During acquisitions, acquiring company sometimes use market research companies to reach out to former execs at the company as part of their diligence.
Can you trade long if you just receive a bunch of requests from market research firms but never actually talk to the acquiring company?
https://corpgov.law.harvard.edu/2023/12/17/sec-defeats-summa...
Is this transitive? If the person with no confidentiality tells a 3rd person and that 3rd person trades, is that still insider trading?
Theft from the company is the central tenet, whether you are an insider, have a fiduciary responsibility, or an outsider who comes across data from inside the company.
Material nonpublic information that isn't taken from the company is fair game, thus all the quant funds that collect detailed market intelligence and trade on it (or the posted example, a passenger on the plane who knew the news ahead of the public). It doesnt matter one whit whether the information was material or public, it matters only that it wasn't taken from Boeing
EDIT: I was involved in the early days of a company that sold data to quant funds, and spent many hours with lawyers on exactly this question
Doesn't it matter how you came across that data? If you were at a coffee shop and happened to overhear a bunch of Boeing engineers talking about how they were replacing bolts with hot melt glue I thought you could you trade on that. If they explicitly told you that they were replacing the bolts with hot melt glue, then you wouldn't be able to.
Further, I struggle to understand how one could learn information which is non-public without "theft" of that information. It would seem that, by definition, if the organization begins sharing that information with individuals who have no confidentiality obligation, they have now made that information public.
What does tend to happen often is that others assume "public" means "written in the news" and that is certainly not the case. There are plenty of things that are knowable by the public but not obvious, and it's perfectly fine to trade on that.
> 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.
But, yes, all of these shorthand definitions are designed for the general public's consumption, and skip over specific nuances - including the SEC's definition. The sentence read above would seem to permit a person with a fiduciary duty to share information with someone who does not have one, and for that person to trade based on the information. However, we know this is not permitted.
In any case, I think my comment still stands. I specifically called out in my parenthetical in the original comment that the information would need to be knowable only by those with a fiduciary or confidentiality obligation to the company. This seems to cover your comment and sibling's concern.
Example: logs of search queries that suddenly trend with adverse information about companies. Those logs are not public, in fact you need to buy them, but they have real signal (thus material and nonpublic), and are perfectly legal to buy and use. Satellite photos to estimate material stacking up outside a factory, or how many cars are in the parking lots of retail stores. Mobile data that has been statistically tied to foot traffic in stores. Credit card purchase data (not public! very material! perfectly ok!) I could go on forever
Go ask a lawyer this is a big space
EDIT: Yes exactly, ITS HAS TO BE CONFIDENTIAL TO THE COMPANY AND THUS TAKEN FROM THE COMPANY LIKE I SAID ABOVE. Your explanation implicated all the cases I described. You haven't seen how explicitly rich are the sources that I mentioned above, they are very very definitely information about the companies that are traded
Regardless of the level of fidelity, if you got that information from an unaffiliated third party entity who captured it in the delivery of their own services, it is not "only available to those with a fiduciary responsibility or confidentiality obligation to the company"
It sounds like we are saying the same thing and you don't feel my original comment was clear enough. That's fine feedback. But there's no substantive disagreement. The points you listed above are all fine to trade on.
Ok so what if you are a Boeing executive or engineer on said flight?
This is where insider trading rules just don’t make sense. Here’s a good example. You can buy credit card data from Bloomberg that will give you near accurate information on revenue. For earnings, you can pay to see if a company will meet expectations and trade off that information. If you work for the company, it’s insider trading. If you work for the credit card companies and get the same info and trade on it, it is also insider trading.
Maybe we should make insider trading, trading off information that isn’t public.
This is stupid. It disincentivizes people who make a living externally auditing/investigating companies
Why? Trading implies making stock trades based on non-public information. This has little to do with auditing and investigating, since that information is not necessarily public.
I once saw somebody say something to the effect that in every Hacker News thread, there is always a highly upvoted comment that sounds completely plausible, well argued, made by somebody who appears highly qualified to answer, and that is completely incorrect.
I don’t think it’s always true, but it often is.
> If you do not have a fiduciary relationship with Boeing and you have no confidentiality obligations with respect to the information, you are not trading on inside information.
Specifically this part. One of the first things you learn when doing mandatory insider trading training is you can easily run afoul of the law if you act on non-public info you overheard, or happened to see by accident, even if it has to do with some company with which you are not affiliated. A common example is you’re in a coffee shop and see an upcoming earnings report on someone else’s laptop screen, then trade based on that information.
> in this particular case is no, it's not insider trading
You seem to be saying it could be, but that wouldn't mean the answer was "completely wrong" (your words)