When is a scoop non-public information?

By Felix Salmon
April 25, 2012
provocation yesterday, where I suggested that the NYT could sell advance access to its stories.

" data-share-img="" data-share="twitter,facebook,linkedin,reddit,google" data-share-count="true">

Many thanks to everybody who responded to my provocation yesterday, where I suggested that the NYT could sell advance access to its stories. John Gapper summed it up well, in a tweet: “If scoops don’t matter to most readers, as the digerati claim,” he said, it’s logical to sell them to those who do value them. Which, in this case, would be hedge-funds capable of front-running the news and making a profit when the news moves markets.

In a sense, there’s something very economically inefficient about scoops like this one. The NYT story came out in the middle of the weekend, when markets were closed; when they opened on Monday morning, both Walmart and Walmex had billions of dollars shaved off their market capitalizations, but no one was given the opportunity to short those stocks at their prior level. After many months of diligent and valuable work on this story, one would think that a genuinely capitalist economy wouldn’t just leave money on the table like that. After all, buy-side institutions pay millions of dollars to analysts who research companies like Walmart in depth; isn’t that exactly what the NYT was doing?

For years, short-sellers have briefed journalists when they find out something damning about a company: think of Jim Chanos, for instance, putting Bethany McLean on to Enron and other companies. More recently, a group of people ranging from Mark Cuban to John Hempton to Muddy Waters to Anonymous Analytics has merged the shorting and the reporting functions, putting on short positions before releasing their own research on a company in the hope of seeing that company’s shares fall as a result.

But while the world doesn’t seem to have blinked very much at shorts helping reporters, there’s a much more visceral opposition to the idea that reporters might ever help shorts. If the NYT were to give any hedge fund an advance peek at its reporting, goes the argument, well, that would be bad.

The journalism-ethics angle to this hasn’t really been fleshed out, though. Mathew Ingram, for instance, says that if news is being put out in the public service, then it shouldn’t be “just another commodity”; if the NYT were to go down this road, then “that would make it a very different type of entity than it is now”. It’s all very vague and hand-wavey.

The Epicurean Dealmaker, in the comments to my post, is a bit more on point:

Why in God’s name would you want to give the reporters and editors of the New York Times even more of an incentive to break market-moving news. Surely you know there are many sides to any story; emphasis is critical. Why would news consumers trust editors and journalists who could directly profit by making a complicated story just a little more controversial, by shading facts and presentation to put a company in a worse light, by selectively releasing (or suppressing) information? Newspapers like the Times have always relied on a not quite accurate but nevertheless crucial image of impartiality for their authority. This would disappear if they were seen to be tools of Steve Cohen or Ken Griffin.

The fact is that the reporters and editors of the NYT already have an incentive to break market-moving news. Talk to pretty much any business reporter, and they’ll tell you the same thing: the story everybody wants to get is the scoop which moves markets. If you develop a reputation as someone who can get those scoops with any regularity, you’ll rise far and fast. It’s not uncommon for business news services to even put out charts of a stock price, showing when a story came out and what happened to the price after it did. Those charts can mean real money in terms of new subscriptions, and also in terms of pay rises for the journalists in question.

So journalists already indirectly profit from moving markets, and my suggestion was that the relationship should remain indirect: the NYT would sell advance access to its feature stories as a package, ex ante, just like other high-end news services. If a hedge fund wanted to pay a very large amount of money for that package, then it could then do with the information as it wished. But in any case if the hedge fund wanted information to flow the other way, and wanted to influence the NYT’s journalists at all, then it would have to do that the old-fashioned way, just like Chanos did with McLean.

But the real problem with my idea, it turns out, has nothing to do with journalistic ethics at all. Instead, it’s the insider-trading rules of markets around the world.

I wrote about insider-trading rules back in 2008, and came to the conclusion that while I wouldn’t necessarily implement such laws if they didn’t exist, I’m not a huge fan of abolishing them, either. Certainly there are well-formed arguments why insider-trading laws should be abolished, but let’s ignore the philosophical arguments for the time being: they haven’t been abolished, they’ve been in force since the 1960s, and everybody has to abide by them.

And the effect of substantially all insider-trading laws is to, in effect, ban precisely the kind of thing I’m suggesting, where a small group of people can take advantage of information asymmetries to make money. The way that most (but not all) stock markets are set up, the ideal is a level playing field, where all players get exactly the same information at exactly the same time, and then act accordingly; attempts to act on information before it’s public are criminalized.

One thing that both the ethical and the legal approaches have in common, however, is the concept of “public information”: both of them object to my idea because the NYT is in the business of putting out public information, and giving hedge funds advance access to that information — before the rest of the public gets a look — would in some way be fundamentally unfair.

The concept of “public information” is not a well defined one, and probably can’t be well defined. Certainly it’s not a function of price: once a piece of information hits the Bloomberg wire, it’s public, even if you need to pay Bloomberg $20,000 a year to see it. Josh Benton raises the example of Footnoted Pro, which costs $10,000 a year — but that service is explicitly based on the analysis of public information which is released to and by the SEC. Michele Leder’s product simply provides a smarter way of finding the needles in the haystack of EDGAR filings.

Is a tweet public information? Yes. Is a Facebook status update? I don’t know, but I suspect it probably isn’t. But here’s something which definitely isn’t public information: hours of interviews with a former Walmex executive detailing exactly when and where the company paid bribes.

In the comments to my post, Daniel Davies makes an impassioned argument that what I’m suggesting would almost certainly be illegal in many markets, even if it might be allowed, in some circumstances, in the US. He also says that hedge funds would never pay $1 million a year for this service. These two things are related. The value of advance notice of NYT stories, to a hedge fund, is inversely proportional to the number of other hedge funds who are also getting that advance access. And here I think is one of the key ways to distinguish between public and non-public information.

Let’s say the NYT prices the service at $100,000 per year, and you’re a hedge fund wondering whether the service is worth paying for. It’s way more than you normally pay for public information, so you’re inclined to say no. On the other hand, if everybody else makes the same calculation and you end up being the only fund to subscribe, then at that point the $100,000 might well be worth it: you could make many times that on one trade. The problem is that if you’re the only fund to subscribe, then the information can’t be considered public any more. And if it’s non-public information, then you risk putting yourself in legal jeopardy by acting on it.

In other words, if the information is public then it’s worth very little, and if it’s non-public then it might be illegal to trade on.

This also explains why it’s so common for executives to complain that what short-sellers are doing is illegal. Jim Chanos had information about Enron which was damning, and he acted on it before it was made public by Bethany McLean. That looks like material non-public information to me. What he did was legal, if he didn’t have any insider sources within the company. But McLean certainly talked to a lot of people within Enron, and she was also talking to Chanos all the while. Which raises some legal grey-area issues.

My feeling is that it would be astonishing, in practice, to see an insider-trading prosecution based on information which the New York Times Company had sold on a subscription basis. It’s the NYT’s business to sell information; doing so can’t sensibly be considered illegal. And similarly, once someone has legitimately bought that information from the NYT, it’s a bit crazy to say that they can’t act on it.

Similarly, I’d be equally astonished to see Sharesleuth, Mark Cuban’s operation, ever prosecuted for insider trading, even if they quite explicitly had sources inside the company they were reporting on. Sharesleuth’s model is not intrinsically unethical; the problem with it is rather that the model just doesn’t seem to work. Still, I’m sure that if and when it does work, the company being targeted would try extremely hard to get Cuban investigated for insider trading. And that’s almost certainly a risk that potential subscribers to any advance-news NYT product have no interest in taking.

More From Felix Salmon
Post Felix
The Piketty pessimist
The most expensive lottery ticket in the world
The problems of HFT, Joe Stiglitz edition
Private equity math, Nuveen edition
Five explanations for Greece’s bond yield
Comments
25 comments so far

Your argument is similar to those made by the “consultants” who were advising hedge funds, who are now facing prosecution.

Posted by Matthew_Saroff | Report as abusive

first of all, I don’t think Matthew_Saroff’s comment is accurate at all. Expert networks are completely different.

But what I do think is relevant is the recent hullabaloo over Goldman Sachs’s trading huddles. As I understand it, that whole story was basically about GS giving their research to their best clients before they gave it to their crappier clients.

Felix – where do you stand on the Trading Huddles? and are they a good analogy here? (I think so…)

Posted by KidDynamite | Report as abusive

“…the story everybody wants to get is the scoop which moves markets.”

Felix, it’s not just market-moving news about public companies. In this brave new media world, the big-branded VCs increasingly feed stories about their portfolio companies to a mainstream media that seems to have insatiable appetites for such fodder. Furthermore, the VC will turn to their own social channels to catalyze awareness and increase the value of their investments. Where are journalistic ethics when everyone’s a journalist? I posted here about it: http://onforb.es/Hf6vbB

Peter Himler
Flatiron Communications LLC
Twitter: peterhimler

Posted by PeterHimler | Report as abusive

There is nothing economically inefficient as stated in the 2nd graf. An efficient market is one where the market adjusts immediately to new information without any profit opportunity for someone who gets it first. The inefficient market is the one where a trader with the information gets a chance to trade with someone who does not have the information.

Posted by Curmudgeonly | Report as abusive

I’m not an expert on this, and it has been a few years since I have been familiar with insider trading laws, but I don’t think the issue is trading on nonpublic information. The issue is (a) insiders trading on nonpublic information and (b) others who misappropriate nonpublic information when they have an obligation (say, to their employer) to keep that information quiet. But if I do some investigating and find information that is not public, so long as I did not acquire that information illegally I am under no obligation to refrain from trading on it. While it may seem icky to some people, I don’t see how it would be insider trading for the NYT to sell early access to its stories.

Posted by Snyderico | Report as abusive

But, so long as the NYT does not sell early access, it would be insider trading for the reporter or (back in the day when scoops came out first in newsprint) the typesetter to tip someone who does trade on the information.

Posted by Snyderico | Report as abusive

Are we making this more complicated than it needs to be?

Knowingly trading on “inside information” is illegal – for a newspaper or a hedge fund or anyone else. Publishing inside information without trading on it probably isn’t in substantially all cases – ex trade secrets, like being tipped to Coke’s secret drink formula. If the NYT starts trading ahead of publication, it must be cautious about its sources in a way that it doesn’t have to be now – this is the down-side to it.

In principle, selling the information to a select few is no different than acting on it by personally trading. In practice, though, it’s more dangerous and smarmy – and unnecessary. By involving multiple players in the scheme the circumstances for a conspiracy charge become automatically present. It’s too easy for one of them to step over the line and put everyone in a cell. Add to this the essential requirement of secrecy on the part of all the players, and you have concocted something that looks ugly from every angle. Trade, don’t sell.

Posted by MrRFox | Report as abusive

Jim Chanos did not have inside information on Enron. To call it such and his alerting the Times to what he knew clouds the issue. Chanos dug through the Enron’s own public numbers and figured out the whole thing was a scam.
Inside information is when Apple tells an investor a week ahead of time that it’s earnings will be.

Posted by Sechel | Report as abusive

Yes, MrRFox, people are making it more complicated than necessary, but in the wrong direction. The analogy of Bloomberg is exactly right. People who pay a heap of money — $20k/yr in the case of Bloomberg — get access to the news long before the general public. When I worked there, only 1 in 10 Bloomberg stories ever went on the open Web, and those that did go on the Web got there minutes to hours after the market had moved. This is no different from the NYT selling early access to its news to anyone willing to pay.

Readers seem to be assuming that the NYT will set up an exclusive relationship with a hedge fund to trade on the stock. That would be improper. But making “early” subscriptions available to anyone, even at a very high price, is still publishing, and the info is public.

If EarlyNYT would really be illegal in some markets, Bloomberg News should be illegal as well, along with every other subscription-only news service. Sounds silly.

Posted by Setty | Report as abusive

I’ll preface this comment by saying I’m not a lawyer and you should obviously never take legal advice from the comments section of a blog anyway. However, I do work in the industry and have had (a lot) of training beat into me over what is and what is not insider trading.

What Felix is proposing almost certainly is not illegal at least in the US. For it to be insider trading you need to have a fiduciary duty not to trade on that information. A classic example is that if you overhear a drunk executive of Company XYZ reveal something devastating about his company at a bar (say, it’s about to file bankruptcy) it is totally OK for you to trade on that.

Assuming that the newspaper reporters don’t have a fiduciary duty to the companies in question (i.e. they did not promise to keep information confidential) then telling it to an investor or trading on it themselves would not break the law.

An example to consider: imagine you are the largest holder of Company XYZ and that same executive calls you up at work and just tells you he’s about to file bankruptcy. Are you restricted from trading on that information? At least in the US the answer is no — simply possessing “insider information” and trading on it is not illegal, otherwise the company executive could lock in holders against their will.

Posted by CasualSophist | Report as abusive

About this: “If scoops don’t matter to most readers, as the digerati claim,” Gapper said, it’s logical to sell them to those who do value them.”

Those digerati! Always saying stuff that’s sooooo worth debunking. I say: go get ‘em!

What I argued in this post is that there are different kinds of scoops and some don’t matter to the users. That would seem to be a more intelligent way to go about it than debunking wildly over-drawn claims like: scoops don’t matter.

http://jayrosen.posterous.com/four-types -of-scoops

Posted by jayrosen | Report as abusive

@Setty, @CasualS –

This part of your two posts is right –

“I’ll preface this comment by saying I’m not a lawyer and you should obviously never take legal advice from the comments section of a blog anyway.”

The substance of the rest of both is seriously wrong/misleading. This is a very intricate subject, and can’t properly be covered in posts. Suffice it to say that a reporter who persuades a corporate insider to give him “inside information” and then trades or enables others to trade on that info before it is publicly disclosed is on the wrong side of the legal line.

Posted by MrRFox | Report as abusive

Felix – you mentioned it obliquely, but it is the central point:

If the NYT gets its information from public sources (not inside information), and creates a mosaic of information, then it can trade on, or sell, that information. It might damage its “news reporting” brand, but it could sell that information without violating insider-trading rules (IANAL)

If the NYT gets its information from insiders who had a duty to not disclose and the NYT knew their sources had such a duty, then the NYT is probably in receipt of MNPI, and can’t trade on or sell that information. It can publicly report on that information, since it’s not trading on, or entering into conspiracy to trade on, MNPI.

If Chanos didn’t get his information from Enron insiders, or from people who got THEIR information from insiders (cf. Raj’s ‘expert networks’), then he can trade on it.

If Bethany McLean DID talk to Enron insiders, then she can’t.

Did McLean tell Chanos what she had heard from Enron insiders? If so, and Chanos knew or should have known those were her sources, then he might have been in receipt of MNPI and restricted from trading, even if he had his own apriori views on Enron.

If McLean did not tell Chanos, and Chanos simply informed McLean about his research in a one-way conversation, then Chanos did not have MNPI (at least from McLean) and could trade.

Whether it journalistically-ethical for the NYT to do this, or smart from the perspective of potentially undermining the NYT news brand, is another story.

Posted by SteveHamlin | Report as abusive

Well said, SteveH.

As things stand now, The NYT doesn’t have to worry if its scoops are based in whole or part on “inside information”, since it does not trade ahead of publication or enable others to do so. If were to engage in either of those, it would have to be ready to prove that ALL its material info came from non-inside sources.

Posted by MrRFox | Report as abusive

MrRFox-

Agree that it is intricate, still disagree on whether or not this would be legal. Yes, you can get into issues over tipper/tippee and whether or not you were promising compensation in exchange for information but… I would still argue that you could make the case that the information receiver is free to trade and that the giver is, if anything, in violation of Reg FD for selectively disclosing.

Rhis seems to be more of a case of investigative journalism outside the confines of specifically disclosed MNPI and simply passing along (or selling) the information that a story is going to be published, well… that would be really hard to press as violating insider trading laws.

To that end, I actually have some case law backing me up on this. There were insider trading cases about receiving advance news of publication (Heard on the Street column from the WSJ and BusinessWeek) but both of those were prosecuted using the fact that in those cases the people giving the information were breaking their fiduciary duty to their EMPLOYER not the companies they were reporting on (i.e. taking a bribe was against company policy).

Posted by CasualSophist | Report as abusive

@CasualS –

Look at it from this angle for a minute – all “inside information” has to come ultimately from “inside”. Anyone who acquires such information and knows or should know or is otherwise chargeable with knowledge that it did come from inside can’t trade on it or enable others to do so until the information is broadly available.

The examples you cite don’t indicate otherwise. They, and the inherent complexity of this matter, do however, make me wish I’d never touched this tar-baby of an issue here on a blog thread – should’a seen it comin’. I’m saying “Good Bye” to the nettlesome critter now.

Posted by MrRFox | Report as abusive

@MrRFox-

I’ll also call it quits after this post, but it’s just not correct to say that trading on MNPI is always and everywhere illegal.

Google “SEC vs. Switzer” (yes, that is coach Barry Switzer) for an example. He overheard MNPI from an insider and because it was determined he did not have a fiduciary duty he was legally able to profit from that information.

The legality of the trade simply does not hinge on the information being “inside” or not. It hinges on whether or not there is a fiduciary duty, which is the point I was trying to make (and which is all too often lost in public discussion of insider trading discussions).

People seem to assume that you cannot trade on private information. You can. It’s just nuanced.

Posted by CasualSophist | Report as abusive

@CasualS: agreed. MNPI prohibits Bob from trading if (1) Bob has a duty to not do so, or (2) if Bob does not have such a duty but is in a quasi-quid-pro-quo relationship (conspiracy) with someone who does have a duty.

Contra, if Bob is on the sidewalk and overhears a CEO (to whom that someone is otherwise unconnected) discussing the CEO’s gangbuster earnings release tomorrow, then Bob can trade away. Bob now has MNPI, but has no duty to not trade on it. And so he can. (again, IANAL)

If Bob were a NYT reporter, and the CEO blabbed the same “earning will beat consensus EPS” to Bob that same afternoon, then Bob has MNPI and presumably a duty to the NYT (per NYT policy) to not trade on it.

Although not clear to me at present, I can’t imagine that a judge would allow the NYT Inc. to trade based on a CEO statement in an interview with a NYT reporter, if the NYT reporter could not trade per NYT Inc. policy.

Posted by SteveHamlin | Report as abusive

I am a lawyer. I have prosecuted and defended civil actions involving claims of insider trading. As CasualSophist points out, “It is nuanced.” An insider cannot trade on non-public information. A second party who obtains confidential NPMI from an insider where he knows or should know that the insider was breaching his duties, cannot trade on that information. [A person who hears an insider saying things in a bar, ballgame or other Public place has no reason to know that the information is indeed confidential NPMI] If the second party tells a third, then it is now gossip or rumor and the third party can trade on it. [This is why Martha Stewart was not trading on inside information--insider told broker, broker told another broker who told Stewart]. For the fact pattern provided, I do not see that the NYT selling all of its news stories early as an insider trading problem. Yes, the reporter obtained information from an insider. But, publishing the story to anyone who is willing to pay for the Breaking News subscription is still publishing. Thus,a trader who buys/sells from reading a newspaper story (although it started from a tip) is not an insider trading problem. It is no different than trading on a foreign exchange when the story breaks in New York.

Posted by JLRII | Report as abusive

RFox references the U.S. v. Winans (612 F.Supp. 827 (1985)) case. That case was not an insider trading case. Winans was not even charged with insider trading. In that case Winans (and others) were convicted of Fraud in connection with purchase or sale of securities (section 10(b)). The fraud was not a fraud against the companies who issued the stock, nor even on the stock market in general. The fraud was Winans’ theft of the property of the Wall Street Journal–the content and publishing timing of his Heard on the Street columns. WSJ owned the content and write to control the publication thereof. It was important that Winans breached his fiduciary duty to the WSJ by leaking that information.

Posted by JLRII | Report as abusive

I will reiterate (again and again as long as necessary) that the “fiduciary duty” aspect of insider trading is a peculiarity of US law and that most other places in the world consider MNPI to be MNPI, tout court.

But the ethical issue here is really quite simple and can be established Socratically:

Q1. Would you rather have advance access to a short-seller story that was about to be published on a short-seller website, or the exact same story, but with the guarantee that it was going to be on the front page of the next day’s New York Times?

A1. The New York Times one. duh.

Q2. Why?

A2. Because I would then know that once I had put my position on, I would be practically guaranteed to be able to get out of it at a profit as thousands of NYT readers traded on the information. Again, duh.

Q3. So it would certainly look like part of the profits made by the premium subscribers would be coming directly from the pockets of normal NYT readers.

A3. Yes! This is exactly why brokerage firms aren’t allowed to front-run their research notes to “best” clients.

Q4. So you’re saying that the simple fact that a story is going to be prominent in the NYT, is itself a piece of material nonpublic information?

A4. Yes I am. Or more generally, that a piece of information is going to be released to the public; this is the purpose of the anti-front-running rules.

Q5. But if it’s OK and ethical for the NYT to “sell” its readership to advertisers, why is it unethical for them to “sell” the readership to hedge funds?

A5. Are you kidding me or something? I can’t believe you just tried to make that argument.

Q6. Isn’t this kind of thing – where large numbers of investors trade based on prices that have been set by traders acting on entirely private information – exactly what the insider dealing laws are meant to prevent?

A6. Yes it is.

Q7. Why?

A8. Because it’s unethical. The “misappropriation” and “fiduciary duty” aspects of US insider dealing law are local quirks. The purpose of insider dealing laws is to protect the market itself, because people in general don’t like to trade in an environment where their counterparty might literally have been given a sneak glance at tomorrow’s newspaper.

Posted by dsquared | Report as abusive

MrRFox/dsquared, the legal or ethical issue surely cannot be as simple as what you make it out to be. If it were, where does it stop? Is it illegal for the NYT to put a paywall on its website because web subscribers would then receive potentially market-moving news before print subscribers? Heck, even for the print version, does the NYT have a duty to ensure that globally, its print edition goes on public sale at exactly the same instant?

Posted by niveditas | Report as abusive

And surely you aren’t suggesting the NYT has violated the law, or its readers would violate the law if they traded on the basis of this story when they saw it in their morning paper, anywhere in the world? If that’s not a violation of the law, why is publishing that on a subscription-only web service a couple of hours earlier than the print edition a violation of the law?

Posted by niveditas | Report as abusive

I understand dsquared’s position. The practice does seem unseemly. It is like a broker front running his client’s trades. Unfortunately, the illegality of that practice also derives from fiduciary duty concepts.
A prohibition on buying or selling capital stock is a profound matter. If it is too broad, it restricts capital flows. If it is too narrow, it invites deceipt. The balance is struck by drawing the line at preventing deceipt. That line is breach of duties. It may not be perfectly fair, but it is reasonable.
The point about front running is interesting. But, it reinforces the point. The reason that brokers cannot front run their clients is it breaches their fiduciary duties to their clients. It was illegal by common law long before it became prohibited by regulation.
Finally, I disagree with the proposition that this is a quirk in US law. For most of my life, insider trading was legal in Europe. And, no one bans trading simply on the basis of its being based on NMPI. If an investor pays an expert analyst to study a company his findings belong to the investor. The analyst’s insights are not public information. And, if he did the job right–they are material. This is the basis of every merger or acquisition I have worked on (several across boarders). If the target company is public, the investor only has to disclose his intentions after acquiring a certain percentage of the stock. He does not have to disclose his analysts reasons for wanting to acquire control, just his intent. And, if he does acquire control in the US, he has a fiduciary duty to the minority shareholders.
And once again we rely upon duties to police the transactions.

Posted by JLRII | Report as abusive

“The reason that brokers cannot front run their clients is it breaches their fiduciary duties to their clients. It was illegal by common law long before it became prohibited by regulation.”

Not true. Front running of client orders has always been illegal as a breach of fiduciary duty. Front running of research notes (or non-simultaneous distribution) wasn’t even illegal until the 2000 Global Research Settlement.

“And, no one bans trading simply on the basis of its being based on NMPI.”

Yes they do. David Einhorn, for example, recently fell badly foul of the assumption that everywhere is like the USA. An analyst’s opinions (as long as they are only based on public information) can never be MNPI, because they are analysis, not information. But a newspaper’s intention to publish a story certainly looks to me like it is information, not analysis.

” Is it illegal for the NYT to put a paywall on its website because web subscribers would then receive potentially market-moving news before print subscribers?”

No; this is obvious from the existence of subscription news services like Reuters and Bloomberg. The test is simply one of whether the practice is likely to damage confidence in the market.

Posted by dsquared | Report as abusive
Post Your Comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/