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Inspired by this question, and I don't know much about insider trading beyond it.

The title pretty much says it all. Let's say I make software that picks up on patterns of insider trading. (For example, short sales that happen just before big news comes out that causes people to trade). I use this software to identify insider trades and make the same trades. Have I committed a crime?

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    Legal advice from strangers on the internet is a baaaaad idea. Ask a lawyer. – ceejayoz Oct 30 '15 at 17:57
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    Oh trust me, if I was really planning on doing this I wouldn't be using stackexchange as legal counsel...As fantastic as this site is. – popctrl Oct 30 '15 at 18:04
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    Good luck. Don't think you're the first to try, and the competition is better funded... but if you think you can square this circle quickly and reliably enough to do yourself any good, go for it. – keshlam Oct 30 '15 at 19:01
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    Just a thought before you attempt this: You might be better off running a simulation of your software's picks for a few years to see if the strategy actually works to create a better return than the market indexes. – JohnFx Oct 30 '15 at 19:32
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    Anyway, if you can reliably identify "short sales that happen just before big news comes out" before the news actually does come out, I suspect you'll find plenty of ways to get rich on that trick alone. :-) – Ilmari Karonen Oct 30 '15 at 22:20
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A cautious "no." Public information is just that, public. If you are able to data mine and use that information to create a buy signal, you are legally able to trade on that signal. Since nothing is ever 100%, your signals would likely just exhibit a very high correlation to stocks being traded on inside information. Regardless of why those trades happened, the fact that they did is public, milliseconds after the trade.

Cautious, because you might still be investigated. As long as you have no ties to the real insiders at these companies, and are genuinely running software to create these signals, you should be fine.

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    Obligatory remark that the software you're describing boils down to predicting the future and would be essentially impossible to create. – Eric Oct 31 '15 at 1:31
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    @Eric: I fail to see how this is "predicting the future". OP's hypothetical software would be looking for patterns in historical data even though that "historical" data might be only milliseconds old. No "prediction" here - just pattern analysis. From my point, however, I think it's difficult because to know that it's "insider trading" you'd have to know what was in the mind of the person doing the trading, which could prove difficult. Of course, if you track the activities of potential insiders and their contacts you might be able to pick up something. Best of luck. – Bob Jarvis Oct 31 '15 at 2:37
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    Phrasing is essential. If you say you are "predicting insider trading," your words could be more trouble than if you instead say, "detecting behaviors comparable with those of insider trading," the words no longer suggest that, at the end of the day, you are aware of insider trading, merely behaviors that line up well with what insider traders do. – Cort Ammon Oct 31 '15 at 10:21
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    @LorenPechtel: but insider traders don't know what patterns the OP can or can't detect with "sufficiently high confidence" to make a profit on. They aren't stupid enough to leave patterns the SEC can detect with sufficiently high confidence to investigate (or, if they are, they won't remain insider traders for long). But the whole fun of "big data" is that it's incredibly difficult for the person whom the data concerns, to know what you'll be able to deduce from it ;-) – Steve Jessop Oct 31 '15 at 12:52
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    @LorenPechtel: with different required levels of confidence to do anything with those people detected as potentially doing it. There are plenty of areas other than market trading where researchers have identified groups of people who are more likely than average to be committing a crime, but where the authorities can't or don't act despite being in principle able to gather (or being given) the same data. OP doesn't need definite insider traders for this hypothetical scheme, just a smallish group some of whom are at it. – Steve Jessop Nov 1 '15 at 2:26
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Nothing at all wrong about that. Be careful that especially before big news, it's rather common that there are huge swings because (a) the market makers pull/widen their quotes, (b) others already do what you are describing and (c) other actors try to exploit the situation by moving the market in one direction chosen at random and taking the profit before the actual news hits, so it doesn't even matter to them which side they bet.

If you spot your pattern you can't know for certain if the cause is actual insider trading or (c) amplified by (b). You don't know, so you take an educated guess and make a bet. That's trading, not insider trading.

Edit: It would possibly be a slightly different case if you could write software that identifies insider trades with a 100% guarantee, which nobody else has been able to do so far. In that case sell it to market regulations or the DOJ for a few millions and retire early and risk free.

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I think the question hangs on "am I insider trading", because the answer depends on who you ask. To a human jury of your peers, the answer is probably "no". You could make a strong case that mimicry is not the same as insider-trading. But to any program that detects insider trading, including your own, the answer would obviously be "yes" because that is essentially what you are trying to do. Mimic insider trading.

And I can foresee this going horribly wrong...

Any programmer worth their salt will make sure to blacklist themselves from insider-trading-detection, else you will create a positive-feedback loop of faux-insider-trading. But unfortunately you cannot blacklist other mimics - after all they look and act just like the real thing. Then a human on any of those bot's lists of insider-traders could control all the bots in a very predictable way.

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