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In Australia, there are two major grocery companies, Woolworths and Coles. Now suppose I work for Woolworths and I become aware of a technological breakthrough that will dramatically increase the popularity and profitability of Woolworths which has yet to be publicly announced.

Obviously, I cannot trade Woolworths shares using this knowledge to profit. However, assuming I have no inside knowledge of the competing company (Coles), am I able to legally trade (in this case, sell) Coles shares using my knowledge of Woolworth's recent development?

More generally, if I have inside knowledge of one company in a particular industry, could this prevent me from trading any company in this industry?

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Trading on non-public information is not, per se, illegal.

There are many statutes and regulations that attempt to restrict or outlaw "trading on insider information," but those are not only fraught with ambiguity but also subject to a great deal of criticism. This is a subject of ongoing debate, as well as frequent regulatory and statutory revision. (Start researching it for a taste....)

"Trading by insiders" is tightly regulated, but it is still legal for insiders to trade while aware of non-public information. (It would be virtually impossible for them to liquidate their equity if no such mechanism existed.)

In the example you give:

  1. You are not legally an "insider" just because you work for a company.

  2. If you obtain "material non-public information" and you attempt to profit from it in the securities market, you might be subject to prosecution regardless of whether you are an "insider."

In practice: Because this a contentious, poorly-defined, and often-politicized matter, you should obtain legal advice before trading on questionable information ... or even communicating it to others! Institutional investors typically retain lawyers for this purpose. And even that isn't enough to keep them out of court and regulatory proceedings, where everyone is still trying to figure out what the rules are.

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Trading is not only purchasing stock expecting it to increase in value. Trading also involves shorting a market (planing on a stock falling).

What you are describing, would still be trading based on knowledge the public does not have. Just because it's not trading the company you are employed at, that doesn't not make it insider trading.

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    If you re-read my quesiton it is obvious I'm aware that trading includes shorting. I was wondering whether if I work in industry X am I able to trade other companies in the industry given my knowledge of the company I work for.
    – Kenshin
    Jun 4, 2016 at 9:27
  • Do you know of any real life cases of a similar nature?
    – Kenshin
    Jun 4, 2016 at 9:28
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    No not offhand.. My point is.. your example is still trading based on "secret" information. Speculating a competitor may suffer due to an internal innovation at your company is the same as speculating the internal innovation is going to propel your company. It's 6 of one half a dozen of the other.
    – Scott
    Jun 4, 2016 at 9:37

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