Knowing the Future Isn’t That Helpful

Some of my all-time favorite insider traders are the hackers who “allegedly stole approximately 150,000 confidential press releases from the servers of the newswire companies” and made more than $100 million trading on advance knowledge of the news. It’s just a whole different game from the usual sort of CEO-tips-his-golf-buddy-about-a-merger insider trading. If you get a merger tip on the golf course, your approach to insider trading is obvious: You go buy as much target stock as you can. You will almost definitely make money, and the trick is to make as much money as possible. Probably you buy short-dated out-of-the-money call options on the target, to maximize your profits when the deal happens. Then you get caught, oops, that’s how this goes. (It’s the Second Law of Insider Trading.) You are just doing a crime.

But when you get every piece of corporate news in advance, your approach is radically different.1 For instance, on a really simple level, if you have 150,000 press releases, how do you choose which ones to read? In the normal merger-tip insider trading cases it is obvious that buying stock of the target before the merger is announced will be profitable: The merger is big news, the merger price is a premium to the current price, the stock will move toward the merger price, it is easy stuff. But some press releases are like “the oldest member of our board of directors has decided to retire.” Is that material? Will it move the stock? Which way?