Insider Trading on SEC Filings

The essential fact of insider trading is that there is a gap between when the insiders of a company know something and when it becomes public. The chief financial officer will get the draft earnings release, and she will circulate it among the executive team, and they will fine-tune the language, and there will be a delay of hours or days in which they know the earnings but the market doesn’t. Or two companies will start negotiating a merger, and due diligence and negotiations will take weeks before the deal is finalized and announced. And during those delays, various people — executives, advisers, others — will know the news, and if they trade on it (1) they can make money and (2) that’s illegal insider trading.But there is another form of insider trading that relies on a different gap, the gap between when the company starts making information public and when it finishes. When the earnings are finalized, when the merger agreement is signed — or often when they are just close enough — the company will fire up the computer systems that it uses to make information public. It will get ready to publish the information on its website. It will get ready to put out a press release on the newswires. It will get ready to file the information with the US Securities and Exchange Commission, whose Electronic Data Gathering, Analysis and Retrieval system (Edgar) collects and publishes information from US public companies. These processes are not instantaneous. You don’t just write the press release in your phone’s Notes app and then send it simultaneously to your website and the newswire and Edgar. Each of them has its own somewhat temperamental interface, and you have to format your news for each of them. That takes time and specialized skills, and when the CFO says “let’s push the button on earnings,” there will be some interlude where the CFO knows the earnings, and the various filing specialists know the earnings, and the market doesn’t.