Consider a situation in which a trader has done legitimate analysis of a security and believes, with 50% confidence, that the company will soon be a takeover target and with 50% confidence that the stock price will decline. No transaction is indicated. Now suppose that an unreliable tipster (right only 10% of the time) calls in with admitted inside information that a takeover deal is imminent. There may be several ways of calculating the new level of confidence, but in any event it is above the 50% level, and a buy is now indicated.
Was this trade “based on” the inside information, or was it based on the legitimate research?
Read more: Enforcing Insider Trading Laws—Confusion Compounded — CNBC’s NetNet
