[gizmo]

Never, because "insider information" is a legal concept that doesn't correspond with what people intuit it means. People wrongly think insider trading is when one party unfairly profits from having important information other investors don't have.

Also, sharing "insider information" isn't illegal. In some narrow cases profiting off of "insider information" is illegal, but in most cases it's not.

[jszymborski]

> unfairly profits from having important information other investors don't have.

It all depends how you come to know the thing, no? If you can infer something from public information others haven't, then bully for you.

I'm pretty sure that if that information is not public, then you're liable. IANAL though so I may be wrong.

[gizmo]

That's totally wrong.

If you make inferences from non-public information (e.g. talking to the CEO) you can freely trade on that, provided the CEO hasn't shared MNPI with you directly.

Every public company has an Investor Relations department that talks to institutional investors every day. Investors wouldn't bother talking to IR if they could get the same information somewhere else. And these communications are not made public and shared with other investors.

[n2d4]

> MNPI with you directly.

Abbreviating that is so misleading, it's incredibly hard to not see it as bad faith! MNPI means "material non-public information". You're saying "non-public information is fine but material non-public information is not", without making it as obvious.

Yes, it has to be material. "Owes $30b in taxes" is ABSOLUTELY material. If on top of that you learn about it from IRS insider contacts, enjoy your time in prison.

Please do read the Wikipedia article; it has a section on the US. https://en.wikipedia.org/wiki/Insider_trading

> SEC regulation FD ("Fair Disclosure") requires that if a company intentionally discloses material non-public information to one person, it must simultaneously disclose that information to the public at large.

[gizmo]

The entire point is that MNPI is a legal concept and information can be both nonpublic (i.e. private correspondence) and tradable for profit (i.e. material) and yet does not constitute MNPI.

You're making the exact mistake that I've repeatedly tried to correct. There is no bad faith on my part.

[n2d4]

Your personal opinion on what "material" means might differ from the court's (and also differs from mine, at least how you phrased it), but I can assure you, a $30bil tax bill is DEFINITELY material.

It's a "legal concept" in the same way that every word used in a lawbook is a legal concept; the US is based on case law, and there is a large amount of precedent for this definition in particular. Again, refer to the Wikipedia for some examples.

I see this mistake a lot among programmers (also myself at some point). They (we) naturally think law is like a rulebook where you go through a decision tree and then arrive at a perfect conclusion, but the truth is that it's up to the courts to decide on the specifics. And they might disagree on those things with you, and with each other, but in the egregious cases disagreements are rare.

[gizmo]

The SEC takes enforcement action in about 40 insider trading cases in a typical year. Most result in fines. Less than half of those cases get forwarded to the justice department. Big "egregious cases" of insider trading cases are practically unheard of. And that's not because wall street is especially virtuous.

Remember that agencies like the IRS, FDA, SEC must not leak a single bit of information (investigation/no investigation). Because that single bit is sufficient to profitably trade on. A hedge fund doesn't need to know the specifics or the exact date of an enforcement announcement in order to make out like a bandit. A tiny amount of signal is sufficient. In fact, a tiny amount of signal is preferred. If a firm knows for a fact that MSFT is in trouble with the IRS they can't trade on it. But if a little bit of information leaks from an agency, that's gold.

[gamblor956]

If you make inferences from non-public information (e.g. talking to the CEO) you can freely trade on that, provided the CEO hasn't shared MNPI with you directly

This is pretty much the literal definition of insider trading, but feel free to follow this advice if you plan on having a long discussion with the SEC while they audit all of your trades for the past decade.

And these communications are not made public and shared with other investors.

This is false. IR departments will only discuss information that is already made available to investors, through press releases or public compliance filings (such as SEC filings). They absolutely will not provide nonpublic material information just because someone asks, and in the event they do so, it's literally their job to provide an investor communication so that the information is publicly available.

[Armisael16]

Unfortunately it’s generally more complex than that, at least in US law - simply having material nonpublic information isn’t enough. It really matters how you got the information.

For example, when Hindenburg Research did a ton of research and discovered that Nikola was basically totally fraudulent, they traded extremely relevant information that wasn’t publicly available. Not insider trading.

Similarly, if Warren Buffet invests in a company, he knows that its stock is very likely to go up (just as a result of the halo effect around him). He doesn’t have to disclose that he plans to buy, though.

[seunosewa]

In which cases is it legal?

[gizmo]

Pretty much all cases?

If you're an institutional investor you can just call the CEO or investor relations and ask them tough questions about their business. Sometimes you can figure out within minutes that the CEO is a bozo.

You can visit their offices and talk to the employees. Are they smart and passionate and hard-working, or demoralized and looking to jump ship?

You can also derive material information for instance through freedom of information requests. Is a business being investigated by the SEC? If you write the right letter you can find out based on the kind of form letter you get in response. This information is clearly material (would move the stock if made public) and non-public (the SEC hasn't disclosed its investigation yet) and yet you're free to trade on this information because you derived it and because any investor would have gotten the same response if they had known exactly which magic words to use in their letter to the SEC.

If the CFO leaks the numbers of the quarter and you trade based on that you risk jail time. If you watch the company parking lot and notice that the finance department and CFO stay at work until 11pm in the week leading up to their earnings report you are free to short the stock based on this info.

[gamblor956]

A lot of what you said is wrong...

Material does not mean "would move the market." It means there is a substantial likelihood that a reasonable shareholder would consider it important" in making an investment decision". https://www.sec.gov/rules/2000/08/selective-disclosure-and-i...

You can visit their offices and talk to the employees.

If an employee tells you something that is nonpublic information, and you act on it, that would likely be considering insider trading by the SEC. There is a fair amount of case law supporting this point. Indeed, the fact that you acted on the employee's information is generally sufficient proof that the information was material; and this is in fact the most common insider trading scenario.

You can also derive material information for instance through freedom of information requests. Is a business being investigated by the SEC?

If the target of the SEC is not aware of the investigation, the SEC will not disclose that information in response to a FOIA request. On the flipside, if a company is being investigated by the SEC, and knows it, that is material information that must be disclosed to the market.

If you watch the company parking lot and notice that the finance department and CFO stay at work until 11pm in the week leading up to their earnings report you are free to short the stock based on this info.

Such behavior would provide no useful information about the state of a company's financials. In the week leading up to earnings reports, the CFO and finance departments generally stay late making sure the financials are in proper shape, whether or not those financials are good or bad. This is standard practice at all publicly traded companies with proper controls, because there is a very short window of time between the end of the financial period and the time it must be reported for regulatory purposes.

[gizmo]

> if a company is being investigated by the SEC, and knows it, that is material information that must be disclosed to the market

In 2016 the SDNY ruled that issuers do not have a general duty to disclose the existence of an SEC investigation or a Wells Notice. Because "the securities laws do not impose an obligation on a company to predict the outcome of investigations".

https://www2.law.temple.edu/10q/sec-investigations-disclose-...

> the SEC will not disclose that information in response to a FOIA request

Not /intentionally/, of course.

> Such behavior would provide no useful information about the state of a company's financials

Some hedge funds have done very very well for themselves by making inferences from parking lot data. You don't need to be right 100% or 75% of the time for the strategy to work, you know.

[splintercell]

Is there any reason why based on the last example you would want to short?

[mwigdahl]

Because it implies that they're putting a lot of effort into making bad numbers look good for the report, and the assumption is that they'll either fail or the truth will come out at some point to make the short pay off.