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Let's say you work for Apple, Inc as a middle class employee. This is a large publicly traded company. By the very nature of your employment there will be limited times that one can make purchases and sells of your Apple holdings, from my understanding so this is mostly an assumption. Likewise I'm assuming, based on the nature of the employment, that it would be nearly impossible to legally short sell shares of Apple, or may be deemed a conflict of interest.

Big companies often are weighted heavily in indexes and in ETFs that track indexes. Such as the SPDR Technology ETF or the Nasdaq. Although trading of a linked security on inside knowledge falls under the prohibition of insider trading, would normal hedging using these securities be prohibited under existing US law? I mean, even if it was prohibited under the securities act you could always sell Nasdaq futures instead - in this example - since those are not regulated under the securities act

Lets say Apple just so happens to be trading at all time highs and is weighted at 20% of a index. if Apple falls 10% then the index that holds Apple will fall about 2%.

Is there anything legal that would prohibit this?

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If you are in a position to have information that will impact the shares of a stock or index fund and you use that information for either personal gain or to mitigate the losses that you would have felt then it is insider trading. Even if in the end your quiet period passes with little or no movement of the stocks in question. It is the attempt to benefit from or the appearance of the attempt to benefit from inside information that creates the crime. This is the reason for the quiet periods to attempt to shield the majority of the companies employees from the appearance of impropriety, as well as any actual improprieties.

With an index you are running a double edged sword because anything that is likely to cause APPLE to drop 10% is likely to give a bump to Motorola, Google, and its competitors. So you could end up in jail for Insider trading and lose your shirt on a poor decision to short a Tech ETF on knowledge that will cause Apple to take a hit. It is certainly going to be harder to find the trade but the SEC is good at looking around for activity that is inconsistent with normal trading patterns of individuals in a position to have knowledge with the type of market impact you are talking about.

  • brokers and the SROs do alot of reporting for the SEC, so the point wouldn't be to hide a trade from the SEC. But to further entertain this, lets saythat it is widely known from historic data that your company's stock price fluctuates seasonally, due to consumer spending patterns or due to being linked to a certain commodity's prices. It would be fair to hedge with an ETF, philosophically speaking, but I find the legal bearing unclear or how one would determine that these hedging practices were inside knowledge vs publicly disseminated knowledge – CQM Apr 8 '13 at 19:47
  • @CQM - I believe (though I could be wrong) that you can set up orders like a stop loss or buy at orders that get executed blindly during quiet periods. Insider trading sometimes happens right under the SEC's noses without raising flags. But a 10% hit on a major stock is going to get the investigators digging around looking for things. A large number of shares short sold just before that hit by an employee(even on a contract) is going to get scrutinized. You should be prepared with a defense should you try even with blind future orders. – user4127 Apr 8 '13 at 19:55

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