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Comment by nramanand | Hacker News Reader

A relevant aside: surely insider trading is happening all the time? There are so many daily market-shifting events involving so many privy parties that it seems inevitable to happen every few minutes (not defending the actions in the article).

How many physicians have been able to get rich from learning a CEO will be out of commission? In that case, I'm not even sure whether it would be considered insider trading.

How does one even go about accusing someone of insider trading? The illegality sounds pretty unenforceable.

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>How many physicians have been able to get rich from learning a CEO will be out of commission?

Do you actually have an answer to that? Or are you just throwing out an unanswerable question as some form of “gotcha”?

Now I’m actually curious. There aren’t _that_ many publicly traded companies; only about 4,000 according to Google. A little over 9,000 IPOs since 1980 [0]. The number of companies where the CEO being “out of commission” on such a short timescale would generate “rich” (to me, in this scenario, >$5 million) levels of ROI has to be pretty low up. Probably not even most of the Fortune 100. Then the number of doctors who have that info and are going to act on it is a smaller fraction. Then the three have to match (command that fits + ill CEO + trading physician). Do you think it’s over 10? 25?

0. https://site.warrington.ufl.edu/ritter/files/IPO-Statistics....

Never in a million years would I have guessed that there have only been 9000 IPOs in the last nearly half-century. Really drives home how many US businesses are privately owned.

It is surprising that it's such a small number, but upon reflection maybe not so surprising. Stock markets were invented to allow massively capital intensive businesses like railways to get off the ground. You can't grow a railway organically by reinvesting profit like a regular business; it needs to be fully built before it can bring in a penny. Naturally there can only be so many of these businesses. In the case of railways they usually become natural monopolies. So being publicly owned was a really great thing.

But most businesses don't need such large capital injections anyway. They can grow organically, and there's very little reason to sell a profitable company. Although it does happen, of course, Google being a prime example, having gone public when already profitable.

It looks like they were only looking at the NYSE and Nasdaq. Smaller companies would not qualify to trade on those exchanges, they would trade over-the-counter. There are more OTC stocks than there are that trade on NYSE/Nasdaq.

"The sample is composed of the IPOs of U.S.-based companies with an offer price of at least $5.00 and listed on the NYSE (excluding NYSE American and NYSE MKT issues after the merger in 2008) or Nasdaq (excluding Nasdaq small cap issues before October 2005 and, after Sept. 2005, Nasdaq capital market issues), excluding ADRs, unit offers, SPACs, closed-end funds, REITs, partnerships, banks and S&Ls, and stocks not listed on CRSP (CRSP includes Amex, NYSE, and NASDAQ stocks)"

But not only the physicians know a CEO will be out of commission. And there are many more cases where a CEO will leave a company without being ill.

And there are much more situations that will influence stock prices than a company changing its CEO. Those situations can be both internal and external to a company.

So I think we potentially have thousands or tens of thousands of people who learn information that make them rich if they act quickly. And even that has a multiplying factor since those people have friends and family.

"Hey Bill, wanna make a quick buck? As soon as market opens buy XYZ. You don't know it from me and I didn't call you today."

>But not only the physicians know a CEO will be out of commission.

Ok, but I was responding to a specific claim from the parent comment specifically mentioning physicians.

Also, most of the situations you are describing are not insider trading. If Warren Buffett calls his secretary and tells them he needs to go to the hospital because he’s having a heart attack, and they short BH on the way, that _could_ be considered insider trading. If I’m a nurse at that hospital and I’m on break outside and watch Buffett being wheeled in on a gurney and I trade on that, that would generally not be.

I agree with you that it's possibly unanswerable, which is more or less the point. The broader idea is that there are lots of obscure interactions like that one I made up.

You can switch up the doctor and CEO patient for anything else. Bankers, lenders, family friends, former professors ... An unbounded number of humans that can come into contact with useful info to trade on. What do we think are the magical constraints that prevent them from doing so? Corporate etiquette?

The ROI will obviously be a function of what information is passed. But I think that I'm more interested in understanding how often it happens rather than that any one case is "low ROI". It is interesting to consider whether it's the ROI threshold that should philosophically make/not make something insider trading.

But nearly all of that isn’t going to be actual insider trader, which is pretty narrowly defined: https://www.investor.gov/introduction-investing/investing-ba...

That would be like saying there are 300 million peanut butter and marshmallow fluff sandwiches eaten a year because that’s the total number of sandwiches made in a year. https://www.ezcater.com/lunchrush/office/state-of-the-sandwi...

Isn't it literally all included in this umbrella section?

> Friends, business associates, family members, and other "tippees" of such officers, directors, and employees, who traded the securities after receiving such information;

In the past, we liked to pretend this was illegal. Now we don't even bother with that.

Insider trading in the US is more about misappropriating information that belong to a party you have fiduciary duties to, not so much about harm to the public.

For example, imagine you are working for Warren Buffet and you learn that he has quietly bought some stocks and next weeks he's going to announce that. Assume that this announcement will reliably make the stock trade up. If you trade on that information, that's insider trading by US laws.

However, now imagine that you are Warren Buffet. You just quietly bought some stock, and you plan to announce that fact next week. If you trade on that information about your intentions, that's not insider trading by US law: you are allowed to trade on your own private intentions and information.

Notice that from the point of view of the anonymous counter party trading with you on the stock exchange, both situations look exactly the same.

That's an illustration that insider trading law in the US is not supposed to protect the public. (At least not originally.) So making insider trading legal in the US wouldn't make the general public any worse off.

Of course, IANAL applies. The above explanation is mostly paraphrased from Matt Levine's Money Stuff.

> Notice that from the point of view of the anonymous counter party trading with you on the stock exchange, both situations look exactly the same. [...] So making insider trading legal in the US wouldn't make the general public any worse off.

Eh? If nothing else, doesn't it magnify the public's risk beyond whatever impact Buffet could have on his own? How can you possibly claim there is no difference?

You might as well say: imagine you secretly give another country nuclear weapons, and assume that that country plans to use them. Now imagine you plan to use them for the same purpose yourself. From the viewpoint of the public, the situation is exactly the same. So nuclear proliferation wouldn't make the general public any worse off.

Or imagine the president picks a random person by lottery every day to run the country while he goes to play golf. The president can take the same actions himself, so from the standpoint of the general public, nobody would be worse off.

> Eh? If nothing else, doesn't it magnify the public's risk beyond whatever impact Buffet could have on his own? How can you possibly claim there is no difference?

Let me be more explicit: Warren Buffett usually doesn't physically execute his own trades. So the only difference between the two scenarios I outlined is that in the second one Warren Buffett tells you (as his employee) to trade. In the first one, you trade without him telling you to do so.

But it's the same person doing the trades in either scenario.

> Or imagine the president picks a random person by lottery every day to run the country while he goes to play golf. The president can take the same actions himself, so from the standpoint of the general public, nobody would be worse off.

Sortition might actually be a good idea.

https://en.wikipedia.org/wiki/Sortition

You completely missed the point. It had nothing to do with who is executing the trades.

>> If nothing else, doesn't it magnify the public's risk beyond whatever impact Buffet could have on his own?

I am saying that when you let others pull the same trick in addition to Buffet himself, they can now bring their own additional funds to play with -- meaning they can make more trades and cause even more damage than Buffet could inflict on his own. This clearly enlarges the blast radius and allows more harm to the public than Buffet could cause with his own funds. It is ludicrous to close your eyes and suggest the situation is no different, just like it is by suggesting that there's no difference between one country having nukes vs. N of them having them.

Heck, the fact that Warren Buffet is used as the example here instead of some random John Doe makes it clear how intentionally ridiculous the example is: for this to even pass the laugh test and obscure the reality of the situation, you have to pick one of richest people of all time, so that even aggregating a thousand other random strangers' funds together would still miss his purchasing power by multiple orders of magnitude.

Why don't you start with someone poor instead of Buffet, then add Buffet to the equation, then try to claim that bringing the billionaire into the equation makes no difference, rather than the other way around?

> I am saying that when you let others pull the same trick in addition to Buffet himself, they can now bring their own additional funds to play with -- meaning they can make more trades and cause even more damage than Buffet could inflict on his own.

Buffett is not inflicting damage on anyone by trading on his intentions. Neither would anyone else.

Also: the typical 'insider' in insider trading cases has far less budget to bring to bear than the typical principal. Eg Warren Buffett (and Berkshire Hathaway) are richer than Warren Buffett's assistant.

Also: 'insider trading' is perfectly legal for commodities and foreign exchange, and the markets in these work perfectly well.

> Why don't you start with someone poor instead of Buffet, then add Buffet to the equation, then try to claim that bringing the billionaire into the equation makes no difference, rather than the other way around?

I'm very poor compared to Warren Buffett. If Warren Buffett wanted to trade on any information I held, I'm very sure we could work out a deal.

If you have clients, now would be a good time for you to become very curious about something called "the principal-agent problem," rather than wait till some prosecutor mentions the phrase before a dock in which you, if permitted a chair, are sitting.

Do you mean the general 'you', or me specifically?

Fiduciary duty is an important concept in any case, yes.

Insider trading around Warren Buffett seems like a really odd example. More typical would be company employees knowing the quarterly results before they are published. And there, it's easy to see how the law is protecting the public by leveling the playing field.

Even in your example the law ain't leveling the playing field: the company is allowed to trade on its quarterly earnings ahead of publishing them.

Technically the law is protecting the share holders. Legal scholars, regulators, and even judges have continually tried to push the fraud-on-the-market theory of insider trading, but IIRC it's been firmly rejected by SCOTUS multiple times. There are statutes where the fraud-on-the-market principal pertains, but for your typical insider trading case predicated on Securities Exchange Act jurisprudence, it doesn't fly. Courts have said it would sweep far too broadly and significantly expand the scope of criminal liability (e.g. end up in prison for trading on something you overheard at the coffee shop). As insider trading law has been largely constructed by the courts (the statute its rooted in says nothing about "insider trading"), Congress would have to be explicit about a further expansion of criminal liability.

Yes. And there's also no bans on equivalent 'insider trading' for foreign exchange nor commodities. And markets in these work just fine.

Some economists suggest that insider trading is good for public markets, because it disseminates information. (However fiduciary duties would still apply. But they would only allow the company to sue the vice president who told her golf buddy about the upcoming earnings, but could not sue the golf buddy.)

>That's an illustration that insider trading law in the US is not supposed to protect the public.

From [0]: >Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the SEC has treated the detection and prosecution of insider trading violations as one of its enforcement priorities.

So it _kinda_ is supposed to protect the public.

0. https://www.investor.gov/introduction-investing/investing-ba...

Keep in mind that the legal theories of the SEC are distinct from what judges go by.

See https://news.ycombinator.com/item?id=43662242

Well if CEO X and his deputy Y pass me on the street and they are overly excited or overly depressed, and I overhear what they talk and I buy some options, does it mean I break the law?

It has been estimated 25% of stock market trading is some sort of insider trading. However 1) it depends where you draw the line what's insider information and what not 2) not all of these trades all profitable.

Due to insider trading rules being problematic, sometimes more headache than benefit, the UK FCA is now allowing new stock market to launch where insider trading is legal.

> How does one even go about accusing someone of insider trading? The illegality sounds pretty unenforceable.

Much of it is data analysis. My favorite examples of this are actual hacks - once foothold is established instead of encrypting & ransoming, the attacker just listens to the CEO/CFO. One hacked a law firm that handled some sizable mergers.

Personal tangent: Once had an opportunity to insider trade on a particular huge aerospace company. Playing a squad-based PvE game, matchmade into a team with 3 real-life friends at said company who chatted on in-game voice comms about their day, talking about court cases and senate hearings, and later panicked when they realized I could hear it all. They were nice guys, and I assured them that I wouldn't misuse what I overheard - I don't work in a relevant industry, and my investments do just fine without an illegal edge (plus I know Matt Levine's Laws of Insider Trading #1: Don't).

You seem to have discovered the crime of insider trading and conveniently ignored the fact that it's a crime.

Maybe all the insider trading going on is part of why the chances for regular investors to beat the market are so slim.

I doubt it.. I suspect that most of us would trade just as poorly if we knew Q results ahead of the announcement :)

Because it maybe up a bit or down a bit, but that's all going to measured relative to assumptions the market has and those assumptions aren't public either.

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