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Imagine sitting in an airplane when suddenly the door blows out. Now, while everyone is screaming and grasping for air, you instead turn on your noise-cancelling head-phones to ignore that crying baby next to you, calmly open your robin-hood app (or whatever broker you prefer, idc), and load up on Boeing puts. There is no way the market could've already priced that in, it is literally just happening. Would that be considered insider trading?

(Not my question, source https://www.reddit.com/r/wallstreetbets/comments/1935frs/is_it_insider_trading_if_i_bought_boeing_puts/ )

hanshenrik
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    I like this question, it makes one think. What about any Boeing/SEC/Airline employees? Would it be insider trading for the flight attendant? What about for a crash investigator who happened to be on the flight? Or a Boeing VP with responsibility over safety? – Brian Jan 10 '24 at 18:56
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    @Brian Exactly the kind of variants you'd be asked about by appellate judges in oral arguments or by a law professor. – ohwilleke Jan 10 '24 at 23:19
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    I'm sure your trading activity would still trigger an insider trading investigation, and when you prove you were onboard the plane, they would close the investigation. – pacoverflow Jan 10 '24 at 23:40
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    "There is no way the market could've already priced that in" Unless some of your fellow passengers beat you to the punch. – pacoverflow Jan 11 '24 at 07:08
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    @pacoverflow and then open an investigation into potential sabotage? – Clumsy cat Jan 11 '24 at 09:20
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    Plot twist: the trading itself is not illegal, but the family of the baby that you ignored sues you for failure to assist a person in danger, and the jury rules that the money you gained with this operation is fair retribution. – Stef Jan 11 '24 at 14:47
  • How is this different from hiking and seeing the door flow away from the plane (assuming it is at a low enough attitude)? Would the fact that OP is in the plane change anything? – WoJ Jan 11 '24 at 15:13
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    Obligatory Alex cartoon: https://alexcartoon.s3.amazonaws.com/1230-plane-crash-shares-11.11.911.png – AJM Jan 11 '24 at 15:29
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    @Stef Failure to assist isn't a tort in the US, so no worries there. :D – Idran Jan 11 '24 at 18:13
  • Not a lot of effect long term. – Russell McMahon Jan 12 '24 at 11:29

3 Answers3

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Is it insider trading if I bought Boeing puts while I am inside the wrecked airplane?

No.

Insider information is information obtained from an "insider" such as an executive or director of the company, or perhaps someone subject to a non-disclosure agreement with the company. Engaging in stock trading based upon confidential information from an insider source, before it is publicly disclosed, is illegal in most cases. See, e.g., here and here. From the first link:

SEC Rule 10b-5 prohibits corporate officers and directors or other insider employees from using confidential corporate information to reap a profit (or avoid a loss) by trading in the Company’s stock. This rule also prohibits “tipping” of confidential corporate information to third parties.

· Who is an insider?

An “insider” is an officer, director, 10% stockholder and anyone who possesses inside information because of his or her relationship with the Company or with an officer, director or principal stockholder of the Company. Rule 10b-5’s application goes considerably beyond just officers, directors and principal stockholders. This rule also covers any employee who has obtained material non-public corporate information, as well as any person who has received a “tip” from an Insider of the Company concerning information about the Company that is material and nonpublic, and trades (i.e. purchase or sells) the Company’s stock or other securities.

When you are not personally an insider, and you are relying on your own personal knowledge, you are not relying on knowledge from an "insider", so you are not engaged in insider trading.

It is also worth noting that Boeing is an aircraft manufacturer, not an airline. So, no one employed by the airline flying the plane would be an insider with respect to Boeing.

ohwilleke
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    I mean, he is inside a Boeing, though maybe not for long. – bdb484 Jan 10 '24 at 15:36
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    @bdb484 Ha ha. That comment is dad-joke class. – ohwilleke Jan 10 '24 at 20:51
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    @bdb484 that's why you have to get that trade out, quick. At least your heirs will have something to remember you by. – Mark Ransom Jan 10 '24 at 23:15
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    @ohwilleke Guilty as charged. – bdb484 Jan 10 '24 at 23:18
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    @bdb484 Rarely was an indefinite article so decisive! – Peter - Reinstate Monica Jan 11 '24 at 01:28
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    So, the pilot would not be allowed to trade United stock the second s/he learns that the plane has an issue, but you'd be? What if the pilot told you confidentially? – Peter - Reinstate Monica Jan 11 '24 at 01:30
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    @Peter-ReinstateMonica "What if the pilot told you confidentially?": as this answer says, "Insider information is information obtained from an insider." If the pilot gives you information that isn't public and that the pilot can't use to make trading decisions about some company's stock, then you also can't use it to make trading decisions about that company's stock. (The question is about Boeing stock, not United stock.) – phoog Jan 11 '24 at 06:52
  • @phoog Yes, Boeing, but the pilot is an insider of an airline, not of Boeing, even if he is inside a** Boeing, so I had to change the company in question :-). – Peter - Reinstate Monica Jan 11 '24 at 08:22
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    So if you were an insider (eg Boeing CEO), you wouldn't be allowed to sell stock that way? Or is that accident "fair game" to everyone because it is public the moment it happens and you don't need any sort of insider information to guess stock will drop? – Zizy Archer Jan 11 '24 at 10:47
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    @ZizyArcher It seems inconceivable that the CEO of Boeing wouldn’t know something that’s not public knowledge and is relevant to share price movements after the accident. – Mike Scott Jan 11 '24 at 13:27
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    When the door blows out, one is arguably only partly still inside a Boeing. – gerrit Jan 11 '24 at 14:13
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    @phoog So if the captain or the cabin crew make an announcement about the emergency, the passengers suddenly have insider information and can't trade United stock (but maybe Boeing stock)? Or does the announcement make the information public even though it has only reached the passengers so far? – jkej Jan 11 '24 at 16:41
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    Even if the pilot dies in the crash, his statements are admissible to convict OP of inside trading, in @Peter-ReinstateMonica scenario. - - - - - Rule 804. Hearsay Exceptions; Declarant Unavailable – Mindwin Remember Monica Jan 11 '24 at 17:28
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    @jkej So, unless suddenly Boeing owns the airline, anything the pilot says about Boeing doesn't affect the insider knowledge equation - jokes aside, he isn't inside Boeing. Any of his statements, including something like "You should short their stock, it is only a matter of time before a Boeing crashes and makes their value crash" would not be insider information. However, if it were from, say, an NTSB investigator (access to privileged info), a Boeing factory manager, etc, it would be a different story. You would have to have a connection to Boeing as something OTHER than a customer. – Brian Jan 11 '24 at 18:47
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    @jkej This isn't insider information, and the captain and cabin crew aren't in this context, insiders (in addition to not being Boeing employees which isn't an airline). – ohwilleke Jan 11 '24 at 20:10
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    Nothing that happens on a scheduled airline flight is insider information. The pilot is in the clear as well. Pilots, passengers, and others are, by definition, outsiders in regard to Boeing. – Therac Jan 12 '24 at 02:42
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    @gerrit a door blowing doesn't affect whether you're still fully inside a Boeing - unless part of you leaves the plane. However, you could argue that after the blow-out you're now fully inside a partial Boeing. – Dreamer Jan 12 '24 at 07:44
  • I'm guessing you are right, but it seems to be just a guess - isn't there some actual case law or written rules that would inform a court case that would prove it to be correct? – user0306 Jan 13 '24 at 18:26
  • @user0306 It flows from the definition of insider trading. Nobody brings cases like these because they aren't even close. – ohwilleke Jan 13 '24 at 19:24
  • "no one employed by the airline" - unless they had an NDA w manufacturer and what was discovered was protected by the NDA? – Brian Cain Jan 27 '24 at 20:55
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Matt Levine has answered this exact question in his yesterday’s Money Stuff column (archive.is link):

Nothing here is ever legal advice but this seems fine? Insider trading, I like to say, is not about fairness, it’s about theft. It’s illegal to trade on information that isn’t public and that you have some duty to keep secret. If you work for Boeing Co. and you put the bolts in wrong and trade on that information, that’s bad: You learned the nonpublic information in your job, and you had a duty to Boeing to use it only for the good of Boeing rather than trading on it. If you’re the pilot, don’t buy puts when the door flies off. (Land the plane!) But if you are just a regular person and you go to McDonald’s and buy a burger and say “this burger tastes bad, I’m gonna short the stock,” that’s fine, that’s legitimate research. If you log into Instagram and say “hey this app is good” and buy Meta stock, that’s good. People are supposed to go around observing companies’ products and services, evaluating them, and incorporating those evaluations into their investment decisions. That’s how stock prices become efficient and how capital gets allocated to good uses rather than bad ones.

Similarly if you’re on a plane and the door blows off and you think “this plane is poorly constructed, I’m gonna short some stocks here,” seems fine. What duty do you have to keep it confidential? Maybe there’s some fine print in your ticket contract but I doubt it. There are probably edge cases. What if you are flying for a work trip: Do you owe some obligation to your employer not to use the information to trade for your own account? Still probably not a huge enforcement priority to come after you.

Mormegil
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  • "What duty do you have to keep it confidential?" I don't understand that question. As if no one else on the plane has realized the door has blown off? As if the whole world won't shortly know about it? – pacoverflow Jan 11 '24 at 16:47
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    @pacoverflow That's a rhetorical question which is immediately answered with "NO". The author agrees with you that there is no duty to confidentiality – divibisan Jan 11 '24 at 17:04
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    Insider trading, I like to say, is not about fairness, it’s about theft. That seems off. Why does the SEC care about theft from a company? The SEC's remit is protecting stockholders and the market in general, not looking after the private interests of particular companies. If you steal cash from your employer and use it to buy stock, you've also profited illicitly from your employer. But it's not the SEC which is going to prosecute you. -- Is the "insider trading = theft" angle a widely held one, or is this just Matt Levine's personal hot-take? – R.M. Jan 11 '24 at 21:52
  • @pacoverflow: I think it's in the context of in the moment of the trade, to your trader - you're telling the stock exchange that you're shorting the stock, and then you happen to successfully short it because of an event happening to your knowledge that will lead to the stock shorting in short notice. But the knowledge isn't something you personally had a hand in. – Alexander The 1st Jan 11 '24 at 22:00
  • Even this overreaches the extent of "insider trading". The employees who are insiders, know they are, and sign paperwork to that extent; they are usually ones involved in trading, M&A, or at least middle management. The worker putting the bolts in isn't an insider for SEC purposes. – Therac Jan 12 '24 at 02:38
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    @R.M. The word "theft" is definitely a poor choice in a legal discussion, since it has it's own specific definition. But colloquially, theft refers to stealing value from the person at the other side of the trade. E.g. I buy a share from you for $100 based on inside information. The price then goes up to $110 after the information becomes public. You should have benefited from the $10, not me. So, I've "stolen" $10 from you by buying the share at a time when it was illegal to do so. – JBentley Jan 12 '24 at 10:46
  • @JBentley Understood, but that doesn't address my confusion. Unjust enrichment and misappropriation of resources would be contract violations or handled through general criminal statutes - if that's essentially what insider trading is, why is it handled through other mechanisms (e.g why does the SEC care)? And insider trading would still be insider trading even if the company comes out ahead in the transaction. – R.M. Jan 12 '24 at 19:05
  • @R.M. Insider trading is a crime (in the US). The S.E.C. sets regulations and collects information for enforcement. "The mission of the S.E.C. is to Protect investors, Maintain fair, orderly, and efficient markets, [and] Facilitate capital formation". Insider trading goes against all of that. The public invests in the markets based on trust that its a fair game. The S.E.C. is out to ensure the public doesn't get cheated out of their money by market manipulation ("theft"). Same reason Nevada regulates gambling. – Schwern Jan 12 '24 at 21:48
  • @R.M. tl;dr The SEC cares for the same reason the IRS cares when you cheat on your taxes. They are the department under the executive whose job it is to regulate and enforce that area of Federal law. – Schwern Jan 12 '24 at 21:49
  • @Schwern "Insider trading ... is not about fairness" is the assertion at question. If prohibiting insider trading is not about protecting investors, or maintaining fair, orderly and efficient markets, but instead is about misappropriation of company resources, why is it in the SEC's remit? – R.M. Jan 12 '24 at 21:59
  • @R.M. I was answering your comment, but now I see I'm agreeing with you. The answer is too narrow by focusing solely on the duty to Boeing. "You learned the nonpublic information in your job, and you had a duty to Boeing to use it only for the good of Boeing rather than trading on it." Yes, that's more of a contract issue. Without enforcement, the market would encourage one to secretly sabotage the product to make money by shorting leading to investor loses (investors aren't protected, markets aren't fair) and loss of confidence in the market (capital can't be raised). – Schwern Jan 12 '24 at 22:45
  • @Schwern "The SEC's remit is protecting stockholders and the market in general, not looking after the private interests of particular companies." This seems a bit self-contradictory. It seems kind of like saying, "The police are supposed to protect you from property damage, not protect your property from being damaged." Harming a publicly-traded company generally is harming its shareholders. Though I generally agree that 'theft' doesn't seem like the right term here. "Securities fraud" would be more like it. – reirab Jan 13 '24 at 00:23
  • @R.M. I believe I did address this part of your comment: "Why does the SEC care about theft from a company? The SEC's remit is protecting stockholders [...]", by pointing out that it isn't "theft" from a company but actually from stockholders, the very thing you are saying is within the SEC's remit. – JBentley Jan 13 '24 at 12:19
  • @R.M. "insider trading would still be insider trading even if the company comes out ahead in the transaction" - again, it isn't the company which comes out ahead or loses out, it's shareholders. If I illegally profit from purchasing a share from you, the other side of that profit is your loss, not the company's loss. – JBentley Jan 13 '24 at 12:20
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Interesting question! No, this is not illegal insider trading:

U.S. SECURITIES AND EXCHANGE COMMISSION - Insider Trading

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.

As an ordinary passenger, you have no fiduciary duty or other relationship of trust and confidence to Boeing, so illegal insider trading isn't applicable to this case. (Unless there is something obscure in the fine print on an airline ticket, somehow burdening you with fiduciary responsibility.)

Vector
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