The Wall Street Journal has done great work on all of the things that people do that look like insider trading but are not, and today's installment involves helicopters. The helicopters use heat-sensitive cameras to measure oil in tanks at Cushing, Oklahoma, and they work for a company called Genscape Inc. that sells that data to energy traders. Genscape also "tracks the production of electricity by placing sensors on private property near power plants and transmission lines, which monitor the magnetic and electric fields they create" and does a grab-bag of other amusing surveillance.
Various people are quoted on whether all this stuff contributes to market efficiency or deters investors from trading or is just silly, but here is the bottom line:
The techniques, which are perfectly legal, represent the latest advance in the longtime Wall Street practice of searching for every possible trading advantage. But the high cost of much of the new information — Genscape's oil-supply report costs $90,000 a year — means that some forms of trading are becoming even more the province of firms with substantial resources.
Now, to be fair, the forms of trading discussed here are mostly energy trading, and energy trading has always been the province of firms with substantial resources, those resources being primarily oil. "Insider trading" in energy markets is not really a thing, because energy markets are largely for producers and users of energy to hedge their production and needs, and that production and those needs are the sort of "inside information" that would move markets. So everyone just kind of gets a free pass to trade on inside information. Genscape says its work "brings transparency to markets long dominated by energy giants" and, sure, why not. Instead of oil companies being on the inside and everyone else being on the outside, oil companies are on the inside, Genscape's customers are peeping through the window, and everyone not paying for Genscape is across the street or whatever.
That said, I mean, you could probably use Genscape's data to trade stocks, why not. Energy stocks have some correlation with energy prices, and Genscape's information, while presumably "material" and reasonably "nonpublic" (do you know how much oil is in the tanks at Cushing?), is not obtained by anyone violating any duties to keep it confidential, which is what turns "trading on material nonpublic information" into "illegal insider trading."
And this story comes a day after Michael Steinberg was convicted of insider trading. Steinberg's crime was basically to tell his analyst, Jon Horvath, "what I need you to do is get me edgy, proprietary, market-moving information that we can use to make money on these stocks." Presumably Horvath could have interpreted this as, "fire up the helicopter and go look at stuff," but he did not; he interpreted it as "call your buddies who work at the companies you cover and see if they have material nonpublic information." They did, Horvath e-mailed it to Steinberg, and those e-mails were ... bad. Not, like, "here is the illegal inside information boss!," but baddish, anyway.
And if you were to ask, well, why is Steinberg going to prison for years while Genscape's helicopters fly free, you will get mostly incoherencies. Level playing field ha ha ha, but it is hard to see why the occasional Dell earnings preview that Horvath got from a Dell investor relations employee and passed on to Steinberg does more to slant the playing field than those oil-tank flyovers. I mean, any investor can call investor relations; that's what investor relations is there for. (Not that they'll give you an earnings preview, but still.) Helicopters are more expensive than phone calls.
A more plausible theory of insider trading laws is that they are designed not to keep the world fair for all traders, rich and poor alike, but rather to prevent company insiders from misusing their inside knowledge for personal gain. This theory is a sensible one -- really CEOs shouldn't be profiteering by trading in their companies' stocks -- but is perhaps undermined by the Steinberg trial. The Journal has a graphic showing how the Dell information got from Rob Ray, a Dell investor relations employee, to Sandeep Goyal at Neuberger Berman, to Jesse Tortora at Diamondback Capital, to Jon Horvath at SAC, to Michael Steinberg at SAC, maybe to Steve Cohen at SAC.
What you'll notice is that everyone from Goyal to Steinberg has been convicted of insider trading. Cohen has never been charged with a crime, which is its own thing, but more importantly, Ray has never been charged. Only the traders with unfair advantages go to jail; the guy who actually betrayed his company's secrets for personal gain is fine.
So the triumphant quotes from Steinberg's prosecutors are ... sort of incoherent? Here is George Venizelos of the Federal Bureau of Investigation:
We will continue to work around-the-clock with the United States Attorney’s Office in Manhattan until traders and portfolio managers everywhere stop using inside information as their edge.
And U.S. Attorney Preet Bharara:
“The jury has found what the government contended from the outset; in search of an edge, Michael Steinberg crossed the line into criminal insider trading,” Bharara said in a statement after the verdict. “Like many other traders before him who, blinded by profits, lost their sense of right and wrong, Steinberg now stands convicted of federal crimes and faces the prospect of losing his liberty.”
It might be interesting to ask Venizelos what proprietary information traders and portfolio managers should use as their edge, or to ask Bharara where that criminal insider trading line is drawn, or why airborne snooping is "right" and calling a guy in investor relations is "wrong." But I'm not sure the answer would be very edifying.
The jury forewoman in Steinberg’s trial, Demethress Gordon, said in an interview after the verdict that “the subtext” of e-mails presented as evidence in the trial convinced her that he “knew, that he was aware” he was breaking the law.
I once drew a more schematic form of this diagram that maybe explains why Cohen has never been charged. Though to be fair my diagram might have predicted that Steinberg would get off too.
Not much personal gain, is maybe part of why:
Unlike other insider trading cases in which traders pay for illegal tips with cash or extravagant meals and other gifts, Mr. Goyal did not provide Mr. Ray with any financial benefits. Instead, prosecutors say that Mr. Goyal gave Mr. Ray career advice, helping him try to land a job on Wall Street, which never came to fruition.
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Matt Levine at email@example.com