Twitter Leaks and Stolen Code

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Twitter earnings.

Of course Twitter's earnings leaked early on Twitter: A company called Selerity, which sells "real-time, machine-readable event data for automated professional investors," tweeted Twitter's results at about 3:08 p.m. yesterday. (I assume it delivered them in machine-readable form to automated professional investors a few milliseconds before tweeting, though you never know.) The problem seems to have been that Nasdaq, which manages Twitter's investor relations page, uploaded the results before they were supposed to be live, and Selerity found them. Good work! Bad earnings, though; Twitter's co-founders lost $750 million on paper after the earnings leak.

Discussion questions: When Selerity found the information (and, let's assume, relayed it to its customers before tweeting it), was it "public"? It was somewhere on Twitter's investor relations site, but not easily accessible from the home page, and Twitter had taken no steps to publicize it. Consider the various bills recently introduced in Congress trying to codify the ban on insider trading. Assuming that Selerity found Twitter's earnings through some sort of scraping technique, would that be banned by any of those bills? For instance, would Selerity's snooping qualify as "espionage (through electronic or other means)"? (Or is it "independently developed from publicly available sources"?) Should this be illegal? Should it be illegal to sell this information to high-frequency traders, but legal to tweet about it? (To 10,000 followers? Does that make it "public"?) What if the high-frequency traders are themselves machine-reading Selerity's Twitter feed faster than humans can?

First as tragedy, then as farce.

Speaking of computery trading things that may or may not be illegal, poor Sergey Aleynikov, who was arrested and prosecuted and convicted and imprisoned and then exonerated and released on federal charges of stealing trading code from Goldman Sachs, and who was then arrested and re-prosecuted on New York state charges of doing the same thing, is having a distinctly ridiculous experience in state court. Apparently Aleynikov may get a mistrial because his jurors have been vastly confused about the law he is accused of breaking, and also can't stand each other:

The exact nature of the dispute is a bit of a mystery, but it apparently involves the female juror and a male juror. Mr. Marino said the female juror was complaining about being the victim of “food poisoning.” Jeremy Glickman, an assistant district attorney, said she never actually expressed concern about “food poisoning.” Justice Conviser said the phrase used was “food tampering.”

Mr. Marino referred separately to something about an avocado and a sandwich.

A grand jury will indict a ham sandwich, but a sandwich seems to have undone this regular jury. If the jury can't continue and the judge declares a mistrial, Aleynikov may get a third trial. Or prosecutors may just drop it but, I mean, they've come this far, why not pursue him to the ends of the earth for no particular reason? (Disclosure: I used to work at Goldman Sachs, but when I left I didn't even take my calculator without permission.)

Some Sarao.

Speaking of computery trading things that, umm, are illegal, how's accused flash crash spoofer Nav Sarao doing? Not great, is the answer; he has failed to meet his 5 million pound bail and so is stuck in jail in the U.K. as the U.S. tries to extradite him. Even if he does get out on bail, he "will have to adhere to conditions including not accessing the Internet," which means he won't be able to read the voluminous commentary that his case has generated. 

It's mostly supportive: It turns out that people love spoofing! Rajiv Sethi is pro-spoofing because he is against high-frequency trading, saying that HFT "practices reduce the incentives to analyze fundamental information about securities," and that "it is only strategies that seek to extract information from market data itself that are vulnerable to spoofing." We have discussed those (plausible) intuitions before here and here, but I do want to say that it's a little odd that the pro-spoofing camp thinks that it is illegitimate to "seek to extract information from market data itself." I mean: I get the intuition! You're just piggybacking on someone else's fundamental research; you're not adding any value yourself. But using market data is so ingrained in financial markets, which have pretty much always run on a market-maker model where dealers use their order flow to set their prices, that it is very weird to see economists and traders conclude that the entire history of market-making is wrong. Maybe it is? It's just weird.

Elsewhere on the pro-spoofing side, Matt Klein points out that spoofers like Sarao never completely eliminate the risk of actually trading on their supposedly fake orders, which is true though I'm not sure it's all that morally or legally relevant. (But then I have no real sense of the morality of spoofing, or why it's illegal, so what do I know.) Klein also says that "If American regulators get their way, Navinder Singh Sarao will spend the rest of his life in prison," which good lord I hope isn't true. If spoofing is illegal (it is!), and if he did it, then he should pay a big fine and be told in no uncertain terms to knock it off. Prison seems unnecessary; life in prison seems insane.

Barclays had earnings.

Seems okay: up year-over-year, good work on "the Transform cost-cutting program," 9.1 percent return on equity, but the stock is down and one analyst points out that "Income growth is anemic." Problems include the dark-pool investigation, 800 million more pounds of FX manipulation reserves, and a board and chairman who "made the unusual-for-Barclays move of not mingling with individual shareholders and depositors" at the annual meeting. Meanwhile HSBC's annual meeting featured prop comics:

Serial bank-baiter Michael Mason-Mahon, a self-styled champion of small shareholders in Britain, pulled the best gag at HSBC’s shindig -- at CEO Stuart Gulliver’s expense.

When complimented on his dapper headwear (paired with a Nehru jacket) by Deputy Chairman Simon Robertson, he explained: “This is a Panama hat for Mr. Gulliver, in case he didn’t get one when he opened his account over there.”

It's funny because Stuart Gulliver "used to have his bonuses paid into a Swiss bank account owned by a Panamanian company when he worked in Hong Kong."

M&A defenses.

Mylan apparently doesn't want its "shareholders to accept what we believe are low-quality Teva shares in exchange for their high-quality Mylan shares in a transaction that lacks industrial logic and carries significant global antitrust risk"; Ronald Barusch calls Mylan's rejection of Teva's offer "one of the nastiest and most condescending rejections of a takeover proposal I have seen." Mylan, which is a Dutch company, has an assortment of takeover defenses which seem a bit odd to American eyes; Barusch points out that even if Teva manages to get a majority of shares and vote out the existing Mylan directors, it can't replace them: Only the remaining directors, or the current chairman, can appoint new directors. Teva also can't acquire all of the outstanding shares because Abbott Laboratories owns about 14 percent of Mylan, subject to an agreement that won't let it sell to Teva. Also there is a "stichting," a Dutch poison pill that Bloomberg News thinks is unlikely to slow Teva down for long.

Elsewhere in defenses, companies are getting sued over "proxy puts" in their debt agreements, which trigger a change-of-control put if a majority of the board is voted out and replaced. The theory is that a proxy put is a sneaky defense against activists: The incumbents can campaign against the activists by pointing out that if the activists win, the company will have to come up with a lot of money to pay its debt. The counter-argument is that this is a legitimate credit protection: Lenders and bondholders want to be protected against the likely leverage effects of an activist board of directors. My view is mostly the latter -- having negotiated these provisions, I'm pretty sure I wanted them for bondholders, not for incumbent directors -- but it is a bit of a puzzle. 

Things happen.

Carl Icahn's lineage continues even unto the third generation. Aubrey McClendon keeps doing things. "A judge on Tuesday dismissed Philip Falcone’s racketeering lawsuit against Dish Network Corp. and Chairman Charlie Ergen over Mr. Ergen’s investment in LightSquared, calling Mr. Falcone’s argument 'frivolous.'" The ECB is considering more ELA. Investors still want more Apple bonds. "In (a little) defence of buybacks." Lend freely, against good collateral, at a penalty rate. It can't be a huge surprise that a company called "My Global Leverage" is in trouble with the CFTC. "Asked whether they earn more or less than they expected when they decided to pursue a finance career, 48 percent of respondents in the Bloomberg Markets Global Poll say compensation is less or much less than they had hoped for." 

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This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matt Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Zara Kessler at zkessler@bloomberg.net