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I work for a publicly traded company, and part of my compensation includes stock. We've gotten a bunch of (recurring) training of what not to do with this stock to avoid insider trading -- for example, if we have advanced knowledge of something bad we shouldn't sell our shares before that news becomes public knowledge, etc.

My understanding is that, basically, my position at my company gives me early information about the company that I shouldn't leverage. But my position gives me early information about the entire industry -- so I'm curious if it means that pretty much any stocks I purchase from my company's competitors in the same industry would therefore be also tainted.

An example. Say I work for Foo Widget Corp. It's the end of the quarter, and I know that my company is going to miss our projections/guidance/etc by a lot: the widget market has unexpectedly cooled. Because I have knowledge based on privileged information (sales numbers and specifics), I know that I shouldn't sell my Foo Corp stock because this is insider trading.

But I also hold stock in Bar Inc, who also manufactures widgets and is Foo Corp's competitor. Since I know that the widget market is in trouble as a whole, can I sell my Bar Inc stock, or is that also insider trading since it's based on my Foo Corp experience and information?

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  • What's your company's personal investment policy? Are you required to get your trades pre-approved?
    – 0xFEE1DEAD
    Dec 2, 2022 at 4:44
  • The company doesn't have a personal investment policy, or at least not at my level (maybe the C-suite has one; I'm not there yet).
    – Roddy of the Frozen Peas
    Dec 2, 2022 at 5:31

4 Answers 4

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The SEC prosecuted Matthew Panuwat of Medivation in 2021 for exactly this. Panuwat learned his company would be acquired by Pfizer, which would obviously drive up Medivation's stock price. Panuwat believed this would drive up Incyte Corporation (a direct competitor) stock also, since people might assume pharmaceutical companies were interested in acquiring other companies in the same niche. The SEC complaint says:

According to the SEC's complaint, filed in the U.S. District Court for the Northern District of California, Matthew Panuwat, the then-head of business development at Medivation, a mid-sized, oncology-focused biopharmaceutical company, purchased short-term, out-of-the-money stock options in Incyte Corporation, another mid-cap oncology-focused biopharmaceutical company, just days before the Aug. 22, 2016, announcement that Pfizer would acquire Medivation at a significant premium. Panuwat allegedly purchased the options within minutes of learning highly confidential information concerning the merger. ...

The SEC's complaint charges Panuwat with violating the antifraud provisions of the federal securities laws, and seeks a permanent injunction, civil penalty, and an officer and director bar.

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    Also, regarding this particular case, it is apparently considered a bit novel to do this kind of thing, and they are starting to call it "Shadow trading". A motion to dismiss the case was denied in Jan 2022, where Medivation's insider trading policy is used as evidence that Panuwat should have known better, more or less.
    – user26460
    Dec 1, 2022 at 23:45
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    Here's a critical Forbes article on Shadow trading and SEC v. Panuwat. Forbes is calling it the SEC's first-ever “shadow trading” enforcement action.
    – user26460
    Dec 1, 2022 at 23:48
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    This is insane they should just legalize insider trading. How far are they going to push it? Suppose you have a friend you meet once a week working for pharma company A and you ask him "how are you feeling today" and he says "jolly" most days but one day he says "not jolly" and you ask home come? and he says "can't say", then you short pharma company B. Have you just shadow traded?
    – Sidharth Ghoshal
    Dec 2, 2022 at 17:39
  • @SidharthGhoshal: My advice: If you are not prepared to make investing your full-time job, it's not worth the hassle of figuring out all the complexities, especially considering that index funds routinely outperform managed funds over long time horizons (after accounting for fees etc.). Nobody ever got prosecuted for buying S&P 500 index funds, at least as far as I've ever heard anyway.
    – Kevin
    Dec 4, 2022 at 10:24
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Insider trading is illegal when you use material non-public information about a company as a basis for trading stock. Just knowing that "the widget market is in trouble as a whole" may not be material enough for a specific company to make trading illegal - especially if that feeling is based on public information. It would be a clearer case if you knew that Bar was about to lose a contract (and that information was not public), but just having industry knowledge may not be material enough to be illegal.

More specifically, just because your company is having a bad quarter doesn't necessarily mean that your competitor is too. And the information that indicates that "widget market has unexpectedly cooled" would have to not be publicly available for it to be insider trading. There's nothing illegal about connecting dots that anyone could see legally.

However, at the end of the day, it matters more what the SEC claims is illegal and what they can convince a judge is illegal.

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    To sum it up: it's not illegal in your opinion but your opinion doesn't matter and anyways you don't know for sure. About it?
    – DonQuiKong
    Dec 2, 2022 at 7:14
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    @DonQuiKong welcome to the legal system where the law is whatever an agency with no legislative powers says it is
    – jwenting
    Dec 2, 2022 at 7:43
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    @DonQuiKong not sure that's a fair summary - the SEC can still claim that it's illegal but has to prove it. I don't see much in the given facts to prove to me that there is material non-public information at play.
    – D Stanley
    Dec 2, 2022 at 14:59
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    @DStanley your answer is it may not beillegal ... Especially if ... It would be clearer [illegal] if ... More specifically: would not have to be illegal, [sth thats not what's asked in the question] is not illegal because the info might be wrong (what if it's not?...) ... But the people that matter might see it differently. Frankly, the answer reads like a big "I don't know but I feel it shouldn't be illegal but that might be wrong." That's not an answer, that's a guess.
    – DonQuiKong
    Dec 2, 2022 at 21:41
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    "Just knowing that "the widget market is in trouble as a whole" may not be material enough for a specific company to make trading illegal - especially if that feeling is based on public information." It absolutely is material. Materiality and publicity are completely different issues. Which is why they are both specified in the phrase "material non-public information". Something being public does nothing to make something non-material. If a company makes holiday wreaths, the fact that it's December is material information for trading its stock.
    – Acccumulation
    Dec 3, 2022 at 5:42
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I see two possible issues:

If the investment in the competitor is large you may have created a conflict of interest just by the fact of ownership. This could be a concern that your company has.

Insider trading. You are using information from your job to make investment decisions. If the number of shares you trade is large enough it might be noticed by the government regulators. They could determine that you used your inside information to buy or sell shares.

There doesn't have to be an employment link between you and the company. If you were an outside auditor and you sold based on the unreleased audit results you could be in trouble. If you told a friend and they bought or sold shares you both could be in trouble.

And by shares I mean any investment product.

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  • But individuals and even companies buy competitor's stock all the time, though usually in a bid to have bargaining power in a proposed merger. You make a good point about a conflict of interest the company might care about, but that's not a finance nor law question. However, being particularly knowledgeable about an industry is expected from those in the industry. I'm unaware of that being an inherent issue when trading. On the contrary, isn't that usually the generator for all those hot stock tips? Besides, don't the competitors have the same industry position, by definition?
    – user26460
    Dec 1, 2022 at 23:22
  • @26460 While knowledge about an industry is expected from those in the industry, there are two kinds of such knowledge: Publicly available information, and privileged information. Of course as an insider you have vastly more knowledge of the publicly available information as well, and you can draw better conclusions from it. You can use this for your personal gain. You cannot use the privileged information. (That this is hard to tell and then hard to enforce so that the average Joe is being had all the time is another matter.)
    – Peter - Reinstate Monica
    Dec 2, 2022 at 9:31
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I would be hesitant.

I've been in that position -- close enough to executive management to be an "insider" for company A, but not close enough to actually know anything important. In my case, I owned some shares in company B. I was never faced with a situation where any information from company A affected how I traded company B.

But, surprise! Not being tight enough into company A, I didn't know that company A agreed to be purchased by company B until it was publicly announced. I couldn't trade shares in either company.

If you are an insider enough with company A to know the details of the sales, and why the sales are (in this case) down, and that isn't something you can read about in the press, and especially if you wouldn't be allowed to write about it in the press yourself, than I would assume that the SEC could make life unpleasant (and expensive) even if you didn't end up serving jail time.

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