← Money Lessons with Andrew Temte, PhD, CFA
Money Lessons with Andrew Temte, PhD, CFA
Insider Trading, Reg FD, and Why Markets Have Rules
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When a corporate executive learns that next quarter's earnings will miss expectations and quietly sells the stock before the announcement, that's not skill. That's cheating. The line between productive information gaps and corrosive ones is where market rules live. And that's the line that we're going to walk today. Hi, I'm Andy Tempte, and welcome to Money Lessons. Join me every Saturday morning for bite sized lessons that are designed to improve financial literacy around the world. Today is June 13, 2026. Last week we explored short selling, the practice of borrowing shares, selling them, and hoping to buy them back at a lower price. Along the way, I noted that short sellers often act on information that other market participants don't have. Sometimes that information is the product of careful research. Sometimes it comes from leaked documents, careless conversations, or tips from people who shouldn't be sharing what they know. That raises a much bigger question, and it's the one we're tackling today. Who knows what in the stock market and when? Welcome to information asymmetry. The gap between what some market participants know and what others know and the rules that try to keep that gap from getting too wide. Now, in any market, information is power. Stock prices move because people act on what they know. Earnings reports, product launches, lawsuits, mergers, economic data, and gossip overheard in an elevator. Whoever has better information sooner has an advantage. That's information asymmetry in a nutshell. Some information gaps are unavoidable, and they're even productive. An analyst who spends two years studying the semiconductor industry will know more about chip companies than a casual investor checking the news on their phone. That asymmetry is the reward for doing the work, and it's part of how markets discover prices in the first place. Other gaps are corrosive. When a corporate executive learns that next quarter's earnings will miss expectations and quietly sells the stock before the announcement, that's not skill. That's cheating. The line between productive information gaps and corrosive ones is where market rules live. And that's the line that we're going to walk today. Now, some information advantages aren't a scandal at all. They're built into the architecture of the market itself. Back in our March 14 episode on the Bid Ask Spread, we met the New York Stock Exchange specialist. Each specialist was assigned specific stocks and stood at a designated post on the trading floor, charged with maintaining a fair and orderly market on those specific stocks. Analysts had exclusive access to the book, the record of every pending buy and sell order for the stocks they handled. No one else could see that book they could see in real time the entire supply and demand picture for their assigned shares. While everyone else in the market was guessing at that supply and demand picture. That wasn't insider information in the legal sense. No one was breaking the law. The advantage came from the structure of the market, and it's a major reason specialist firms were among the most profitable on Wall street for more than a century. Today's electronic markets have narrowed that gap considerably. Designated market makers, the modern descendants of the specialist, still see order flow that retail investors don't. The architecture has changed, but the principle hasn't. Some information asymmetries are baked in now. Two terms that you'll hear thrown around on financial television deserve a quick definition because pundits use them constantly to sound knowledgeable. And the actual distinction is much simpler than they make it sound. This is a buy side analyst versus a sell side analyst. Now a sell side analyst works for a brokerage or an investment bank. Their job is to publish research reports on companies and industries that the firm's clients read. The research is meant to drive trading activity at the firm because that's how the firm earns commissions and fees. Sell side research often reaches brokerage clients before it reaches the general public. In contrast, a buy side analyst works for the firms that buy and hold securities like mutual funds, pension funds, hedge funds and insurance companies. Their research stays internal. It informs the buying decisions of the firm they work for and the public never sees it. Notice the asymmetry. Who the research is for shapes who who sees it first. Sell side reaches paying clients before the public. Buy side never reaches the public at all. The retail investor sitting at home with a smartphone is by design downstream of both. Now, insider trading is the corrosive kind of information asymmetry, and it has a specific legal meaning. It is illegal to trade in a company securities while in possession of material, non public information about that company. The word material means that the information would matter to a reasonable investor's decision. The word non public means that it hasn't been broadly released. Corporate insiders like officers, directors and shareholders who own more than 10% of a company's stock are required to report their trades to the securities and Exchange Commission, where anyone can look them up. That reporting requirement exists precisely because insiders have the most natural access to material non public information, and transparency about their trading is the first defense against any abuse. The prohibition on insider trading reaches further than the insiders themselves. Let's take the case of Rajat Gupta, a former Goldman Sachs board member who in September of 2008 sat in on a private board call where directors learned that Warren Buffett was about to invest $5 billion in the bank. Within seconds of the call ending, Gupta phoned his friend, who was a hedge fund manager. His friend bought tens of millions of dollars of Goldman stock before the news became public. Both men went to federal prison. His friend went to prison for 11 years and Gupta for only two. The law punishes both ends of the chain the tipper who shared the information and the tippy who traded on it. Now, for most of the 20th century, public companies routinely held private calls with favored Walt street analysts and large institutional investors. Material information, the kind that moves stock prices, would flow first to that select audience and then days or weeks later to the broader investing public. By the time a retail investor learned about a company's slowing growth or a new product delay, the professionals had already traded on it. In August of 2000, the securities and Exchange Commission adopted Regulation Fair disclosure, also known as Reg fd. The rule is simple in concept. When a publicly traded company discloses material information, it must release that information to everyone at the same time. The mechanism is typically an SEC filing, usually a Form 8K or a widely distributed press release that any investor can access. Reg FD didn't eliminate information asymmetry. Companies still hold conference calls, analysts still ask sharper questions than retail investors can. And institutional investors still have research budgets that a retail investor can't match. What Reg FD did was end the worst of the selective disclosure. This private heads up to favored clients before the rest of the market got the news. The rules narrow the gap, but they didn't close it. Now what does all this mean for you? The retail investor is structurally on the wrong side of many information asymmetries and no amount of personal effort will change that. The professionals have more time, better tools, deeper access and faster connections. Pretending otherwise is the surest way to lose money. A few thoughts that follow from Be skeptical of anyone who claims that they have an edge. The hot stock tip, the can't miss trade. The friend who heard something from someone who heard something. If the information is genuinely material and genuinely non public, acting on it can be illegal. If it isn't material or non public, then it isn't an edge at all. It's just speculation and hearsay. More usefully you should focus on what you can control. Costs, diversification, time horizon and behavior. None of these require an information advantage and all of them have much more reliable relationship to long term returns than chasing inside knowledge ever will. The investors who do best over decades are rarely the ones who knew the most. They're the ones who didn't kid themselves about how much they knew. Next week, we'll bring much of this Equity series together with one of the strangest market events in Modern Memory, the 2021 GameStop episode where leverage, short selling and information asymmetry, and market plumbing collided in ways that exposed structures that most investors didn't even know existed. Until next week, I wish you grace, dignity, and compassion. My name is Andy Tempte, and this is Money Lessons. You can find the show on all the major streaming services as well as out on YouTube. Please like, subscribe, rate, and most importantly, share this public educational good with your friends, your family, a colleague, and maybe a neighbor. The show was produced by Nicholas Tempte, and we'll see you next time on Money Lessons.