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Matt Levine

Insider Traders Made Some Easy Money on Stock Offerings

Here is a trade that is almost guaranteed to make money, though it is also double super illegal.

One thing that I like to say about insider trading is that people think it is illegal because it is unfair, but it is actually illegal because it is theft. Unfairness is just a fact of life, and of markets: People who are better at research will do better research, smarter people will have smarter insights, people with faster computers will trade faster, etc. Random individual hobbyist investors are not entitled to trade on a level playing field with people who invest billions of dollars for a living. Much regulatory lip service is paid to the idea that they are, for reasons that elude me, but it is obviously untrue.

The reason that insider trading is illegal is that nonpublic financial information belongs to someone, and if you use information that belongs to someone else without their permission, then you are stealing it. A company's information -- about earnings, or a merger, or whatever -- belongs to the company as a whole, and it is generally illegal for the company's executives or agents to trade on that information if it has not been made public. This distinction is at the root of many insider-trading facts that people find confusing. For instance there is the "personal benefit" test that has confounded prosecutors and politicians since the Newman decision: It is illegal for insiders to sell information from their companies (because that looks like theft), but it is not clearly illegal for insiders to give away that information (because that doesn't). Or there is the fact that activist hedge funds can legally tip other hedge funds about their next target: The other funds can trade on that information because the owner of the information gave it to them as a present, so no theft was involved.