This is a great read. One thing I wonder about: in the short run this kind of “insider” edge is good for PMs in terms of accurate pricing, but in the long run could it drive away traders if they start to feel the process is rigged. Then in the long run it could become bad for information aggregation.
your point about how hard this is to prevent given cross market arbitrage is a great one. Maybe there isn’t much that can be easily done
This is totally unsatisfying for at least two reasons.
First, you admit the Google situation is clearly illegal! (Not legal advice) The employee is stealing Google's proprietary information, in violation of a duty of confidentiality owed to Google, for personal gain. Same is true when Cargill's trader does the same in her own personal account, too. Pretty clear cut!
The relevant legal difference is that Cargill (or Google) can trade on its own account on its own proprietary information in commodity markets.
Second, 18 USC 1348 criminalizes commodity fraud in a manner highly similar to securities fraud. This was a 2009 amendment omitted in this discussion (see FERA, Pub. L. No. 111-21, 123 Stat. 1617).
On 18 USC 1348: The statute criminalizes "schemes to defraud" and obtaining money through "false or fraudulent pretenses," which fits poorly with trading-on-information where there's no affirmative misrepresentation.
The Blaszczak litigation shows courts resisting exactly this kind of stretch: the Second Circuit held that fraud statutes require depriving someone of "money or property," and trading on confidential information doesn't satisfy that.
Blaszczak also mentioned a different standard when it came to data that commercial enterprises generate to sell, however, citing Carpenter. How do you address that?
More generally, if the price were the product — something of value — why wouldn't that product be sold? In other commodity markets, is the price in and of itself valuable, or is it the ability to make deals at that price?
I think it’s both. And it’s not even about making a deal insofar as trading the actual product, it could be super useful to two counterparties trying to strike a bargain about a totally different thing - these prices can be inputs that inform their negotiation. Being able to trade on top of it is nice too.
This is a great read. One thing I wonder about: in the short run this kind of “insider” edge is good for PMs in terms of accurate pricing, but in the long run could it drive away traders if they start to feel the process is rigged. Then in the long run it could become bad for information aggregation.
your point about how hard this is to prevent given cross market arbitrage is a great one. Maybe there isn’t much that can be easily done
Academic PM purists like Hanson argue that insider trading is the point, and those who want this to succeed as an asset class will be more wary.
I include myself in the latter category. But I also felt like the issue needed an honest treatment. We can’t just bury our heads in the sand!
It doesn't alter the article but worth noting that news organisations were also aware of the raid in advance, so it is not clear that the trader was from intelligence services (albeit their source presumably was) https://www.pbs.org/newshour/nation/trump-administration-thanks-the-media-for-keeping-quiet-before-the-strike-that-captured-maduro
This is totally unsatisfying for at least two reasons.
First, you admit the Google situation is clearly illegal! (Not legal advice) The employee is stealing Google's proprietary information, in violation of a duty of confidentiality owed to Google, for personal gain. Same is true when Cargill's trader does the same in her own personal account, too. Pretty clear cut!
The relevant legal difference is that Cargill (or Google) can trade on its own account on its own proprietary information in commodity markets.
Second, 18 USC 1348 criminalizes commodity fraud in a manner highly similar to securities fraud. This was a 2009 amendment omitted in this discussion (see FERA, Pub. L. No. 111-21, 123 Stat. 1617).
Sorry to hear that I didn't satisfy you.
On 18 USC 1348: The statute criminalizes "schemes to defraud" and obtaining money through "false or fraudulent pretenses," which fits poorly with trading-on-information where there's no affirmative misrepresentation.
The Blaszczak litigation shows courts resisting exactly this kind of stretch: the Second Circuit held that fraud statutes require depriving someone of "money or property," and trading on confidential information doesn't satisfy that.
I don't think my analysis is incomplete.
Blaszczak also mentioned a different standard when it came to data that commercial enterprises generate to sell, however, citing Carpenter. How do you address that?
More generally, if the price were the product — something of value — why wouldn't that product be sold? In other commodity markets, is the price in and of itself valuable, or is it the ability to make deals at that price?
I think it’s both. And it’s not even about making a deal insofar as trading the actual product, it could be super useful to two counterparties trying to strike a bargain about a totally different thing - these prices can be inputs that inform their negotiation. Being able to trade on top of it is nice too.