Are the rules that prevent Insider Trading still relevant?

The world is going through a shift that hasn’t been seen since the days of the printing press. Information is everywhere – in our computers, our tablets; in the very air around us, through wireless networks.

 

With this onslaught of information coming from all corners, we have to ask ourselves — what constitutes Insider Trading?

 

Can any information truly be considered inside when an ill timed tweet, post or podcast can leak vital information?

 

What can be considered private when there is a lamp that can live-tweet conversations in real time?
In the 21st century, in the heart of the digital revolution, we have to ask ourselves are the rules for Insider Trading that were devised nearly a hundred years ago still relevant?
And if they aren’t, what can we do?
As many of you know, legislation in Canada is not really law until it hits the courts. The politicians may decide that something should be law, but until a precedent is set, it is difficult to enforce.
It typically takes three judgements for that precedent to be set. Then future judges who have to deal with the issue have something to look to for guidance when the issue comes up in their courts.
These precedents for insider trading were set in the 1930s. To put that into context, in the 1930s radios were just coming onto the air, there were no televisions and Henry Ford had just released the model T into the masses.
It was into this environment that the precedent for Insider Trading was put into effect.
Fast forward 80 years. Today not only do we have televisions, we have cars that have computers built in. It even passes through and around our bodies on its way to the next wireless network. A millisecond of time can spell the difference between a million dollar paycheck, and bankruptcy. How can rules that were put into place in the 1930s keep up with this exchange? We can barely keep up ourselves!

 

Let’s look at a theoretical situation:
Two people are exchanging information about their company, information that is not publicly accessible. Now say a hacker comes along and steals that information they are exchanging in confidence.
How he steals it really isn’t the issue, but let’s assume it’s using a technology that wasn’t around in the 1930s when the precedents for Insider Trading were set in Canada.
Then that hacker shares that stolen information with the community at large.
Now, if one of the people in the community sees that information and acts on it, either through buying or selling his own stocks, what happens?
Is he guilty of insider trading?

 

We asked this question to our community here at P4Capital, who address these concerns everyday, and these were some of the answers we got.
P4Capital
Jeremy Paczuski: I would think that the person is guilty of insider trading if he knew it was stolen information
Devon Alltree: “Is there a technology that is available to find out and explain where people are getting this information from? How could it be proved? On the information release side the rules on what constitutes market information versus insider information is unclear, there will have to be a defined amount of latency built into that process so that it is fair for everyone.”
Jeremy Paczuski: What constitutes insider information? Say someone who runs Hedge Funds flies out to look at something as a third party. He then sees how that thing operates and makes decisions accordingly. Isn’t that essentially Insider Trading? And what if he tweets about what he sees and someone acts on that information? The laws need to be updated to reflect that.
Archana Ravinder: It all comes down to ‘is my tech better than your tech’ right now.  The FBI had been wire-tapping companies to find out where all the information and Data is coming from as they try to get a handle on this. You just can’t control where information is coming from or going now-a-days
Jim Carlson: What about Analytics? If your analytics rely on insider trading at all, are you guilty of it? If you ask me, with all this technology every company out there is participating in ‘Insider Trading’ to some extent. It’s only the companies without the advanced technologies that are getting caught.
P4Capital

What do you think?

Join the conversation! Tweet your responses to @planet4it or comment below in the comment section! The best answers will be featured on our Website!

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