Here’s a small fun puzzle in insider trading law. Let’s say that you’re a senior executive at a public company. You know that the company is about to be acquired at a premium. You would like to buy your company’s stock in order to profit from the merger announcement. If you buy the stock a day before the merger announcement, you will make lots of money, but you will also go to jail for insider trading. If you buy the stock a day after the merger announcement, you will not go to jail, but the price will reflect the merger premium and you will not make any money.
If you buy the stock a minute after the merger announcement, the price will also probably reflect the merger premium and you won’t make any money. But there has to be some time after the merger announcement when the price is still wrong. Somebody has to be the first to notice the merger announcement and buy the stock to push its price up to the correct level. In modern markets, that somebody is probably an electronic trading firm, or really multiple electronic trading firms, and the business of noticing market news is highly competitive and efficient.
