Comments on: Insider Trading.

Question: Insider Trading.

Anonymous — Thu, 22 Jun 2006 21:16:49 -0800

The UK based company I don't work for is not a fairly large online financial information provider. Understandably we receive no traffic at all from Google and other search engines for searches related to various company names. Recently I discovered that we catalogue all the search terms by which people reach our site and do a WHOIS search on their IP address using public WHOIS servers. We then search this information for things like "users from ms.com searching for takeover and at least one other word." Then we buy shares in whatever company people from ms.com are looking for along with takeovers. We have no relationship with any of the companies involved other than that we get to see their search terms. So far there is a definite correlation between these things, and we have made money. Could this qualify as insider trading? We are exploiting non publically available information that's for sure.

By: Steven C. Den Beste

Steven C. Den Beste — Thu, 22 Jun 2006 21:36:05 -0800

I don't see how it would count as "insider trading", at least in the US. But IANAL.

It would definitely help if you said what nation you're in, since the details of the law vary from country to country regarding this kind of thing.

By: Steven C. Den Beste

Steven C. Den Beste — Thu, 22 Jun 2006 21:36:19 -0800

My apologies; I need to read more closely.

By: danb

danb — Thu, 22 Jun 2006 21:51:34 -0800

We are exploiting non publically available information that's for sure.

With all the false negatives, I'm not really sure what exactly is going on. But if that is meant to be taken at face value: huh? It's just a Google search, right?

By: Ironmouth

Ironmouth — Thu, 22 Jun 2006 21:54:04 -0800

Probably not by U.S. standards. You have to get the information from an insider, a person who has a fiduciary duty to keep the information secret. Note that the fact that you are a U.K. company may not matter if you are trading in U.S. stocks. Seek competent legal advice from local and U.S. counsel for an answer upon which you can rely.

By: evariste

evariste — Thu, 22 Jun 2006 22:39:13 -0800

I'm inclined to say that since the sort of searches you're mining are rather speculative in nature: if someone is searching for this, then they likely don't really know anything, they're just wondering. However, the appearance of impropriety is strong, and might sway a regulator against you. That, and you are making use of information that isn't available to stockholders at large. Maybe the person who sold stock to you wouldn't have sold if he knew that Microsoft employees were looking for "RealNetworks acquired", or whatever. Appearing clean is as important as being clean these days. So, watch it.

By: I Love Tacos

I Love Tacos — Thu, 22 Jun 2006 22:42:49 -0800

I don't know, but this gives me all sorts of evil genius ideas, the legality of which are uhh... undefined.

By: wilful

wilful — Thu, 22 Jun 2006 22:57:03 -0800

IANAL, but you are fine. What tehy choose to indiscreetly disclose is up to them. If you were in a bar and overheard a conversation, or in a hotel lobby and read some documents, that's not insider trading, and the onus is on the person disclosing to not do so.

By: ClanvidHorse

ClanvidHorse — Fri, 23 Jun 2006 00:14:54 -0800

This is not insider trading.

Insider trading usually involves an element of deliberate disclosure by a knowledgeable party which is either acted on by the party or is passed onto someone as confidential knowledge and is then used to buy shares.

You are basically just using a sophisticated form of market rumour -which may be derived from some confidential information- but cannot be considered so in the form you get it.

Also, there is no denying that there is a huge element of guess work in this.

IAAA who has not looked at insider trading since study class but I think this is ok.

By: rongorongo

rongorongo — Fri, 23 Jun 2006 04:22:47 -0800

I would have thought the most vulnerable aspect of this system is not its legality but its susceptability to spoofing.

By: patricio

patricio — Fri, 23 Jun 2006 05:05:05 -0800

In England insider dealing type offences are regulated by the Financial Services and Markets Act 2000. The offence (under s118) is called "Market Abuse" and covers a multitude of sins related to insidery type activity.

The relevant bit of law are:

(2) [behaviour] where an insider deals, or attempts to deal, in a qualifying investment or related investment on the basis of inside information relating to the investment in question.

Information will only be "inside information" if it is "precise" and
(a) is not generally available,
(b) relates, directly or indirectly, to one or more issuers of the qualifying investments or to one or more of the qualifying investments, and
(c) would, if generally available, be likely to have a significant effect on the price of the qualifying investments or on the price of related investments.

Information is "precise" if it:
(a) indicates circumstances that exist or may reasonably be expected to come into existence or an event that has occurred or may reasonably be expected to occur, and
(b) is specific enough to enable a conclusion to be drawn as to the possible effect of those circumstances or that event on the price of qualifying investments or related investments.

(6) Information would be likely to have a significant effect on price if and only if it is information of a kind which a reasonable investor would be likely to use as part of the basis of his investment decisions.

So, your company has to be dealing on inside information. The information you are using is probably not generally available, relates to companies, but would it really have a significant effect on share prices? It's unlikely that if you published this information the market would move significantly. It's also unlikely to be "precise" in that a reasonable (sane?) investor wouldn't invest on the basis of some google searches.

(IAalsoAL, who should have known this but had to look it up.)

By: nomad

nomad — Fri, 23 Jun 2006 09:37:19 -0800

Who are these people that google search for companyname + takeover when they're about to takeover a company? They should know better.

By: jamjam

jamjam — Fri, 23 Jun 2006 15:00:28 -0800

Thank you for a fascinating question. I think this is wrong, and probably widespread.

Here is how I would try to take advantage of your company if I had the right sort of ISP, a willingness to walk on the wild side, and a disposition to gamble (have none): I would get together with my friends at work, find some small companies which might reasonably be taken over by my company, buy a little stock in them, then go along with my friends to all the sites like yours I could find and conduct the searches your company is looking for. After your company's purchases drove my stock up, I'd sell. After which the stock should go back down to its original level, or lower.

You could, conceivably, get some credit at work by being alert for something like this and taking action to limit your company's losses.

By: joshwa

joshwa — Sat, 24 Jun 2006 21:06:51 -0800

What I want to know is:

who, when contemplating a takeover of company x, goes out and searches google for the phrase "takeover company x"?

By: deliriouscool

deliriouscool — Tue, 27 Jun 2006 09:33:21 -0800

joshwa, I'm sure that would be employees of a. company x or b. the company taking over - all it takes is one staff meeting where some higher-up says "Bob is looking into opportunities for growth for us" and Bob says a few words about that, and boom, enough people know to drive a measurable amount of traffic to this company's site.

BTW, I'm weighing in with "devilishly clever" and "possibly unsavoury" if not actually illegal.