1.

Wat is inf asymmetry

Information asymmetry occurs when one party has better information than
another. This advantage results from the ability of professionals to analyze
the available inf at hand + predict the trend of prices.On the other hand, it
may also come from the inside inf
Without information asymmetry, it wouldn’t be possible to earn alpha
from information based trade.
• EX: Remember investor A who believes he has better information about
stock XYZ’s intrinsic value ($35).
=> If investor A turns out to be right (lucky he does get it right in the
example), he can make money by buying the stock at $15.
=>If all market participants have the same information about the stock’s
intrinsic value, it would be priced at $35 today and there would be no reason
to trade.

2. Wat is the difference btw insider inf + private Inf?. When does Private inf
become insider inf?

In this definition, wat considered material infor is infor abt public company or
public fund which hasn’t been disclosed and if it is disclosed, it could have major
impact on prices of securities
Private information is the superior ability to interpret information or the
ability to formulate a “better” belief about the pricing implications of the inf
• In other words, the superior analyst has the same public information or raw
data as other investors but is better at analyzing it and predicting changes
in prices.
=>This analysis generates alpha.
=>ethical to trade on private information and to sell your talent, e.g. in the
form of proprietary research reports.

However, trading on insider infor is unethical cause it means that u violate PII abt
ethical use of inf ( all parties have access to relevant infor) and P IV abt Trust +
Fairness (ur trading partner believes that u will not violate the insider trading laws
+ he places the trust in u)

=> Warren Buffet is an investor who illustrates the concept of superior private
information.

Private inf become insider inf is the case:

An analyst uses his talent to analyze a report and provide it for a publisher to print
on the newspaper tomorrow.But a person working in this publisher read this report
and he uses this private inf to trade before the news is used + reaches the reader. It
means that sbd uses private inf of another to trade + earn profits.This private inf
now becomes insider inf
3.Wat is a tipee.? EX
Tippee - a friend, acquaintance, or anybody else
who gets the information from a corporate
fiduciary or another reliable resource.

 Tippees can also be charged with insider trading.

 A tippee can also receive the information “nth” hand.

4.Wat is material inf ? Why is it important in insider information

Trading in advance of any information dissemination that is likely to move
the market is unethical. This information is called material. A good rule of
thumb is to ask, “If the investor on the other side of the transaction had the
same information, would he/she go ahead at the same price?” If the answer is no,
then the transaction is unethical.

Info..is ''material'' if: Its disclosure would probably have an impact on the price of
a security or reasonable investors would want to know an infor before making an
investment decision 2 Key factors on determining whether a particular piece of
info fits the definition of material : the specificity of the infoand the source or
relative reliability
Material is one of 2 factors in insider infor,Together with non public . Therefore,
It is an indicator for us to see whether a piece of nonpublic inf is insider or not.If it
is material then it is insider inf and vice versa.Therefore, material indicates
whether the use of this piece of inf is ethical /unethical
5. Why would influential publications or star analysts be able to move
prices? When is it ethical to trade on talent
Star analysts - analysts that are top rated by various financial publications
and have the ability to move stock prices with their investment
recommendations.
Cause they are prestigious and usually have precise predictions abt the trend
in the stock market, investors always tend to believe and trust them.When a
large number of investors follow their recommendation, a big order flow
will move in a specific direction + affect the stock prices.That’s why their
forecasts are valuable inf before they are made pubic.If a investor knows abt
 the inf before other investors, the trade on this can be profitable but
unethical and illegal
Similar to the ethical issues with star analysts.
 Using inside information to trade on securities before the information
is publishedis a violation
 unethical and illegal
EX: Heard on the Street” is a column in the Wall Street Journal that can
move the prices of securities of companies discussed. In the 1980s, R.Foster
Winans contributed to this column. He conspired with others to trade
in advance of the column and was convicted of insider trading
=>Their forecasts and recommendations are valuable information before
they are made public
=>Trading in advance of the public dissemination of this
information can be profitable.
=>unethical and illegal

6.Wat is mosaic theory, and why it is important in countering

accusations of insider trading
Mosaic theory - the idea that securities researchers can take pieces
of public information and through analysis, assemble the pieces to
reveal an accurate forecast of future value
 distinguish between insider information and talent.
 if the investor can show how he made predictions using public
information, he is “in the clear” (i.e., he can demonstrate how he created the
mosaic).
EX: => Suppose an investor creates a model predicting takeover targets.
=> Inputs into this model could be declining stock price and earnings
(indicative of mismanagement),low holdings of corporate executives (so
they aren’t able to effectively fight the takeover), and so on.
=>A sophisticated model could justify a good track record by such an
investor.
=>ethical and legal
7. Define front Running .Explain why this practice is considered to be
trading on insider inf
• Front running - the practice of placing an order ahead of the trade of
another investor.
=>In other words, trading on trading by another investor, which is a very big
institutional investor
=>Usually occurs when a broker gets an order from an institutional
customer.
=>Due to the large side of the order or the identity of the customer, the
broker reasonably predicts that the order will move prices.
=>The broker then places a trade before the customer’s order.
=>unethical and illegal. This inf is material + nonpublic, so it is insider inf,
therefore, this behaviour is trading on insider inf

EX: an institutional investor tells a broker that he wants to order a flow at

the price of $10. The broker at once orders his own trade to buy an amount
of stock at $10 .Because of this behaviours, the stock price is now raised to $
11 and the investor now has to buy at higher price than intended

8.Wat is a Chinese wall or a firewall? Why is it important in the

investment business?
Chinese wall or firewall - firm policies and procedures to prevent
sharing of information between the investment banking and investment
management division of the same firm.
The investment banking is often the sell- side, whose role is to sell stock to
raise capital. The investment management division is the buy- side whose
job is manage the asset or portfolio to make profit
=>also used to prevent analysts from losing their objectivity when rating
the securities of corporations that are clients of the investment banking
division.
=>create lists of corporations and securities that they are actively involved
with in an investment banking deal, thus the money management
division can’t trade on these securities.
EX: The sell-side intends to implement M&A in company X and the inf is
known by the buy-side.Cause the aim of the buy-side is profit, they will
trade on the A’s stock and it’s unethical. However, if a Chinese wall exists,
the buy-side cannot know abt the M& A but with their own talent they can
produce private inf and decide to invest in A’s Stock , it is ethical

9.Wat is pump and dump? Why does this practice work well in thinly
traded markets?

• Pump-and-dump schemes are designed to artificially increase the price of

a stock before selling it.
Pump” - the criminal purchases the stock then disseminates false nformation
designed to increase buying interest and increase the price in the stock.
“Dump” - once the stock has increased in price, the criminal sells and makes
a profit.
Thinly traded securities are those whose trading
volume is minimal.
=> Buying or selling a thinly traded stock between accounts not only makes
it appears as though more than one party is interested in the stock, but
also increases trading volume
=>As volume surges, the market infers that there is some hidden positive
information about the stock and others begin buying the stock
=>Buying pressure increases the stock price