Insider trade on Splunk acquisition?

Let's assume this turns out to be insider trading. Can someone shed a little insight on why this is worthy of a prison sentence?

To me, even if they used information they had and we didn't, I don't see who the "victim" of this crime would be. It truly sounds like a "but it's unfair" argument and I'd really like to know why I'm wrong here.

Thanks in advance

Whoever sold them those call options, at the very least.

If you were the other side of that trade then you’re the victim. For everyone else it erodes trust in the market

Fair markets are efficient markets. Regulators try to keep the markets fair and efficient. If a market is unfair, participants are scared away, which leads to more inefficiency and potentially a collapse of the market.

Someone had to sell the that call option . . .

Whoever sold it wouldn't have sold it if they knew a merger would be announced the very next day (or wouldn't have sold it at that price, to be more accurate).

I can't tell you why any non-violent crime warrants a custodial sentence. It seems like civil penalties really ought to be enough deterrent and a much better recompense to society.

Who is the victim?

The person who bought the stock you knew was worthless or sold you the stock you knew was gold.

Why is insider trading a crime?

It's an unmanageable market advantage, if we didn't disallow it then people wouldn't play. The people who make the rules benefit from people playing.

The person(s) that wrote the options is the victim(s). They lost ~$10m because they lacked knowledge that the insider had.

It all depends on your values. A lot of good things happen by trying to reduce unfairness, where possible. Public schools allow anyone to be able to get an education, not just those with money. Health care lets people get the help they need if they are unlucky enough to get a devastating disease.

So the "victim" here is society. People can use their connections to get an advantage over others. They can turn that money and those connections into an even larger advantage. Then their relatives can inherit that and continue that. And if the system is blatantly rigged, why would normal investors want to be involved in the market?

Again, it depends on your values.

>I don't see who the "victim" of this crime would be

The person that sold the options. They were offering cheap insurance for a very unlikely event.

Think about what the US economy would look like if anyone could do this any time they wanted to.

Options are really zero sum, every dollar you make is necessarily a direct loss for somebody else.

Insider trading also makes markets more efficient. So I don’t think your argument is as strong as you think.

I also think it’s weird we don’t apply this consistently. I can buy many assets with “non public information”, just not those the SEC regulates. So it’s not really about markets at all, but specifically about fairness for shareholders (or something by like that?)

It pretty much undermines the fairness of the entire market. If insider trading wasn’t a crime, the single goal of every investor would not be to find investable companies but to find insider information.

The stock market would cease to be an effective tool for raising capital.

It would be more akin to the crypto market where there are no such rules about insider trading and everything is pumped and dumped via influencers and degens acting on insider tips.

It is by definition not efficient because some participants have more information available to them than others.

you are muddying two concepts. It is important that people have the perception that markets are fair, and actual fairness should be considered an important part of that.

but in terms of market efficiency, trading on inside information actually does move the market in the correct direction, toward its new market clearing price, so trading on inside information generally makes the market more efficient: if you are trading based on statistical properties of the market, "a diversified portfolio across market sectors", having the prices be corrected will give you a more balanced portfolio.

I'm not an expert on the intricacies of the regulations around acquisitions, but Cisco, big company, deciding to acquire Splunk, smaller company, is a very material fact about Splunk. Acquirers are only allowed to acquire a certain number of shares before making a public tender offer, because shareholders are entitled to know this information.

answering GPs question "who is harmed", well if you collect profits on one big trade, they came from somewhere, they came from people who traded with you without having the information you have, a trade which you enticed by making your lowball offer which only appeared like a good offer because they were in the dark. If such trades were legal, then insiders would corner the entire market for shares before any announcement was ever made.

the "secret" about the pending acquisition is what makes the market inefficient. Trading based on the secret information does integrate that asymmetric information into the price creating better price efficiency.

Just because the harm is socialized - spread across a large population - does not mean the harm is diminished or that the crime is victimless.

In some ways a crime like this is worse for not harming any particular person directly. First, because people often convince themselves that not having a clear victim means it's victimless and therefore okay, which is where your line of thought seems to be going. Second, because the lack of a clear victim means such crimes can go relatively unnoticed, unmitigated, and under-punished.

IMO, white collar crimes (and not just the explicitly illegal ones) are an insidious disease on society. The indirectness of the harm serves as a kind of camouflage against peoples moral judgement, but that's a failure of judgement. It's like falling for that trick that kids do where they spread their food all over their plate so it looks like they ate more of it.