| | | From Matt Levine today --
One thing that I think about sometimes is the similarity between journalism and insider trading. Consider: You are in the business of finding out things about companies that nobody else knows, so you spend your time developing sources at those companies who will tell you things. If their company has a new product coming out, or is about to announce a merger, or has been doing fraud, they call you to tell you before anyone else knows.
Sometimes they tell you things just because you ask, and they are indiscreet. Sometimes they tell you things out of a sense of public-spiritedness: They think that what they know should be known more broadly. Sometimes they tell you things out of a sense of grievance: They are mad at their bosses and want to leak information. Sometimes they tell you things because you are friends: You have done such a good job of developing relationships that your sources think of you as a personal friend, not just a transactional counterparty. Sometimes there is some amount of favor-trading involved: You get information from them, and in exchange you give them something that they want. Perhaps that is also information: You give them news or gossip about their firm or industry that you got from other sources. Or perhaps you can give them career advice. Or maybe you just buy them lunch, or drinks. Maybe you pay them cash! [1] Often, of course, their motives are mixed; they tell you stuff out of public-spiritedness and grievance and friendship and favor-trading and carelessness all at once.
What do you do with this information? Here are three possibilities [2] :
- You work at a newspaper, you write up a story containing your sources’ secret information, and you publish it on your website and in your print newspaper.
- You work at a hedge fund, and you trade on your sources’ information: You buy ahead of the merger announcement, sell ahead of the accounting fraud, whatever.
- You work at a very small and odd newspaper, one that charges $1 million a year for a subscription and that has only five subscribers, all of them hedge funds. You write up a story containing your sources’ secret information, you put it in your newspaper, and you send it to your subscribers, who then trade on it.
Option 1 is called “journalism.” [3] It is generally considered a good thing — the public has a right to know secret stuff, etc. — and in the US it is protected by the First Amendment. [4] Of course some of the readers of your newspaper will trade on what you publish, but that’s fine; journalism can move markets.
Option 2 is usually called “insider trading,” and in most cases, in the US, it is illegal. [5]
Option 3 is a gray area! It seems clear to me that if you have one subscriber and a million-dollar subscription, that’s insider trading: You work for a hedge fund, but you have an obfuscatory job title. Probably at five subscribers it is still insider trading. [6] On the other hand, at a million subscribers and a $200 subscription, you are clearly a journalist: Publishing a story behind a paywall, to paying customers who get it before everyone else, still counts as journalism.
Disclosure! Bloomberg News publishes many stories to Bloomberg Terminal subscribers before they are on the website. But that is still journalism.
I think that probably the dividing line between “journalism” and “insider trading” is, like, some number of subscribers? The number is not that high. I think that sending a newsletter to 50 subscribers, 95% of them hedge funds, for $50,000 each per year, probably looks more like journalism than like insider trading. Whereas five subscribers is insider trading. But I am just making that up and oh boy is it not legal advice.
Anyway the Financial Times reports:
A group of veteran US financial journalists is teaming up with investors to launch a trading firm that is designed to trade on market-moving news unearthed by its own investigative reporting.
The business, founded by investor Nathaniel Brooks Horwitz and writer Sam Koppelman, would comprise two entities: a trading fund and a group of analysts and journalists producing stories based on publicly available material, according to several people familiar with the matter.
The fund would place trades before articles were published, and then publish its research and trading thesis, they said, but would not trade on information that was not publicly available.
The start-up, called Hunterbrook, had raised $10mn in seed funding and is targeting a $100mn launch for its fund, according to two people involved. “Watchdog” was a name floated early on for the news arm. …
In an early message to potential investors, seen by the Financial Times, Horwitz said the investment fund would get “unique access” to articles before they are published. “Rather than try to predict or react to events, we time trades on news we break ourselves,” he wrote, styling the venture as “the first trading fund driven by a global publication”.
The reporting team — which Horwitz’s email said would include journalists who have worked for the WSJ, BBC and Barron’s, as well as “intel analysts” — aims to publish market-moving investigative pieces “like Bloomberg”, but with no advertisements or subscription paywall.
I don’t know! The two claims here are:
- You “break news” and “publish market-moving investigative pieces ‘like Bloomberg,’” which means that you employ reporters who get sources to tell you stuff that is not already public, and
- You produce “stories based on publicly available material.”
There is someoverlap between those categories. Sometimes you can, like, read a company’s securities filings closely, notice something weird, publish a story saying “Company X admits Y in its annual report,” and say you have broken news and moved the market with your investigation of public documents, without using “information that was not publicly available.” Or Freedom of Information Act requests are a common journalistic tool that can get you information that is technically public and yet known only to you. You can buy a company’s product and take it apart and see if it’s made of cobwebs. Other things. Still I feel like a lot of investigative journalism involves calling sources and asking them to tell you stuff that isn’t public? And then if you publish it that’s fine, that’s great, that’s classic journalism. But if you trade on it first, that’s riskier. [7]
Of course, there is another obvious comparison for this model. What is, like, Hindenburg Research if not an investigative reporting organization that trades on its investigations before it publishes them? The whole model of activist short selling looks pretty much like this: You try to find public companies that are frauds, you investigate them, you short their stock, and then you publish your investigation, hoping that it will drive the stock down. Carson Block, another activist short seller, “ describes what he does as ‘investigative journalism married to a different business model’ and is trying to rebrand activist shorts as ‘journalist investors.’”
The risks of that model are pretty well known. For one thing, yes, insider trading; some short sellers try to rely mostly on public information to avoid being accused of insider trading. [8] For another thing, activist short sellers are constantly accused of market manipulation: It is just widely assumed that, if you bet against a company’s stock and then publish bad stuff about the company, you are doing something fraudulent and manipulative. If you publish stuff that is wrong, you will get in trouble for securities fraud: Betting against a stock and then publishing falsehoods about the company to drive down the stock is classic fraud, and no one will be sympathetic if you say you made an honest mistake. Even if you publish stuff that is right, people will be suspicious. There is an ongoing US Department of Justice investigation of activist short sellers, “probing possible coordination surrounding the publication of short reports, looking for signs of market manipulation or other trading abuses.” Is Hunterbrook/Watchdog's whole business model a “sign of market manipulation or other trading abuses?” I don’t think so, but I bet some people will. |
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