All over the world, everyone connected with the equity markets hates insider trading, with the presumable exception of those who get away with it. Those who study and research stocks find it unfair that there are other people who make money because they get valuable advanced information on the side. Many investors assume that insider trading, in the form of company insiders leaking and trading on information, is a common phenomena, specially in India. This may well be true. In any case, whatever be the scale of such activity, there can be no doubt that it is indeed, insider trading.
However, a recent insider trading case in the US is raising some new questions about what is insider trading. In a highly publicised case, US authorities are prosecuting two men who were programmers in Capital One, a large credit card and loans company. Over a period of three years, the two generated returns of 1800 per cent on their equity investments. They did this by analysing the credit card usage patterns in the data that passed through their employer’s servers. For example, they knew well in advance of anyone in the markets that the casual dining chain Chipotle would declare much higher sales because they had been able to query the database for actual customer transaction volume and value.
While there’s no doubt that what they did was in violation of their employment conditions, was it insider trading? Many people think it wasn’t, and I agree. They formulated and ran thousands of queries on the data. They wrote software to analyse the results and look for patterns. Insider trading is when someone calls an insider and just asks for information. These guys did serious data-centric research, albeit on data they should not have used.
This case raises some questions that SEBI should start worrying about in India. In India too, a lot of similar activity can take place, and in fact, must be taking place. We need to move beyond trying to monitor the friends and relatives of promoters and management to understand new ways in which stock-sensitive information gets generated and handled.
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