Updated: Insider Trading is Tougher Than it Looks

A week or so ago I argued with Herb on CNBC that a little insider trading is an acceptable price for keeping insider trading payoffs down, and reducing the cost of market oversight. He disagreed, but I was still right. (And now I’m sure he’ll disagree even more strenuously.)

Anyway, another side of this overdone insider trading issue is that it is actually much harder to do well than it looks. Case in point: A release today from the SEC highlighting how it caught an Oracle vice president in the deed, who had been receiving “tips” from his wife, an executive assistant to Larry Ellison.

But there is a twist. The guy made some money based on insider trading, but not that much. Despite, for example, knowing about the Oracle/Siebel deal in advance, and despite investing almost $500k based on his inside info, he only made $82k. Granted, that’s non-zero, and it’s still illegal, but the thing that intrigues me is that insider trading is made out to be this sure-fire path to riches, and, as this example shows, it’s much harder to make big money at it than how naive observers characterize it.

[Update] Two points to make my argument clearer.

  1. It is easy to make money buying expiring out of the money options the day before a deal is announced. It’s just hard to keep that money after the SEC show up at your house a few weeks later.
  2. Far more inside info than we all like to think turns out to be valueless. Maybe the market knew about the deal, maybe the market didn’t like the deal, maybe the product was a bomb, maybe some other news intervened, maybe the deal fell apart, etc. There is only one way to make money on inside info — the markets thinks the news is as important as you do — and there are lots of ways to lose money on inside info.


  1. this reminds me of bank robberies. a 2002 FBI report states the average take is less than $5,000, and the chance of them solving the crime is around 60%. yet in 2001, a bank was robbed in the US like every 52 minutes?

  2. I’m always intrigued that the take that alleged inside traders made before they were busted are what seem to me like oddly picayune sums. This goes towards me assertion that with the amount of time, planning, and effort it takes to pull off the perfect crime, you might as well run a legitimate business: it’s just as time consuming, and you are less likely to be arrested.

  3. 98% of all things offered for sale are over-priced.
    Insider information is like all information applying Theodore Sturgeon’s law: 90% of everything is crap.
    Recognizing a bargain is a rare skill.
    All that said, quality insider information can give an experienced trader an edge. And quality is always rare.

  4. He could have bought short dated otm options of sieble. That’s why he didn’t make a lot. He had great info but he didn’t have the insight to exploit his advantage fully.

  5. Surely the argument against insider trading is less about the absolute sum of money made than it is about any money made at all, which would not have been made, were it not for ‘insider information’. Would that Oracle Veep have made $82K (not chump change for most people) without the tips? If not, then he is better off in pure economic terms, for having received the tips.
    That said, dutch is right about the need for insight. Inside information is actually just inside data, it becomes information only when combined with insight.

  6. agree – and it bothers me how the SEC continues to target (relatively) small software companies on rev recognition issues – even though rev reconition is increasingly outdated in a world of services. Guess the Feds need to show some “successes” and the software industry with our showy behavior continues to be a good whipping boy

  7. Insider trading is for dopes. Having a sound disciplined strategy is the only way to make the big money in the stock market over time. Having a strategy that you do EVERY day, cutting losses, and a great money management technique. These things alone are how you make big money in the market. Not insider trading.

  8. gelslinger says:

    I agree with Paul, here at Intel we actually have classes on insider trading, but still nobody seems to be able to make any money on it.

  9. Certainly there are those who consistently make money trading stocks without insider information. There are fewer than claim they can and these make more bad trades than they will admit to.
    But some do this, right? These same traders will be more successful (risk of prosecution aside) with added insider information since they are already successful at processing and utilizing non-insider information.