Akademik

(in.sy.dur NON.tray.ding)

pp.

Deciding against buying or selling a stock based on insider information. Also: insider non-trading.

To understand insider nontrading and to see the asymmetry problems it can cause, imagine an executive who goes into a board meeting at Pfizer to learn that Viagra has received FDA approval.

If the executive comes into possession of material nonpublic information prior to its public dissemination — which the announcement of the FDA approval would surely be — and if the executive leaves the room, only to place an order for Pfizer stock, that executive will be guilty of violating the insider trading laws and can, like Martha Stewart, face jail time and penalties as well as public humiliation.

However, suppose the executive owns stock in Pfizer that, before the board meeting, she's planning to sell.

She goes to the meeting, learns of the FDA announcement and decides not to sell. She has acted on inside information.

— Richard B. McKenzie, "What About Those Who Use Inside Info And Don't Trade?," Investor's Business Daily, November 12, 2002

The Securities and Exchange Commission, in a heroic attempt to make the rules equal for all traders, has stepped up surveillance to combat insider trading. In doing so, however, it has ignored a potentially far more serious problem. During any given trading period, only a tiny fraction of outside issues are actually traded; the rest are not traded. In other words, the volume of non-trading vastly exceeds the volume of trading. As Henry Manne (a longtime critic of SEC restrictions on insider trading) has pointed out, insiders may use nonpublic information to profit from not trading as well as from trading. The preponderance of non-trading in the market implies the SEC, in its efforts to stop insider trading, is neglecting what may be a much larger problem: insider non-trading.

— William A. Kelly Jr., "The Plague of Insider Non-Trading," The Wall Street Journal, December 11, 1986

The Gordon Gekkos of the world profit by taking actions based on insider information (that is, information that's not available to the public). If these market miscreants learn that something good is going to happen to a company, they buy the company's stock now in the expectation that the price will rise when the good news is announced. Similarly, if the insider learns that something bad is going to happen to a company, the person sells the company's stock in the expectation that the price will fall when the bad news is announced.

With insider nontrading, a person profits by not taking an action based on insider information. In the case explained in the example citation, the insider learns a company is about to get some good news so he or she decides against selling the company's stock. Similarly, if an insider learns that a company is about to get some bad news, he or she could decide against buying the company's stock.

The only real difference between these scenarios? The former is illegal while the latter is legal. But insider nontrading is just as wrong as insider trading. As the earliest citation shows, market-watchers have recognized this for some time, but no one really knows how to prove a "nontrade." The proposed remedies are usually just plain silly. For example, the author of the earliest citation suggests that insiders "must file periodic reports (we suggest monthly) on what trades they did not engage in and why." Yeah, that'll show 'em!.