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Person X makes a scientific discovery about some new metallic alloy. She then reasons that as a result of its applications, the market for some other metal will drop. Is she allowed to short the stocks of some company trading in this other metal, before she publishes her result? I would appreciate pointers on this area of legal finance.

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Is she allowed to short the stocks of some company trading in this other metal, before she publishes her result ?

Generally speaking, yes. The main exceptions consist of her being under certain form of fiduciary duty toward the company of which she is shorting stock, or (2) her transactions being motivated by superior knowledge resembling insider trading or fraud.

Absent an element of fiduciary duty or insider trading, what you describe is an entirely valid arms-length transaction. Indeed, this happens all the time in financial markets, except that a lawful asymmetry of information may come in forms other than the scientific discovery of new metallic alloys (example: statistical models developed by the entity).

Searching for case law containing the terms in italics will show you how these concepts supposedly are applied. For instance, see Procter & Gamble Co. v. Bankers Trust, 925 F.Supp. 1270 (1996):

No fiduciary relationship exists ... [where] the two parties were acting and contracting at arm's length. Moreover, courts have rejected the proposition that a fiduciary relationship can arise between parties to a business relationship.

(citations omitted)

You will notice that the court in Procter & Gamble points to case law in the sense that a party's superior knowledge imposes on him a contractual duty to disclose that information. But the notion of superior knowlege as applied in case law seems typically narrowed down to situations where the seller conceals defects for which he is responsible (Haberman v. Greenspan, 82 Misc.2d 263 (1975)) or when the concealment resembles fraud. Haberman points to a case of fraud

where (1) the seller of a boat before the sale took it from where it lay and placed it afloat in a dock to prevent the examination of the bottom which the seller knew to be unsound [...]; and (2) where the seller of a log of mahogany turned it in order to conceal a hole

(citations omitted).

That is different from the superior knowledge that a party obtains through the design of superseding techniques.

It would be extremely inept for a court to rule against a party for trading without first bringing everyone up to speed as to her superseding developments. Not only that would contradict the tenets of trade secrets, perhaps patents, and so forth, but in the context you outline it would create inconsistencies with respect to other financial instruments associated to the same perception of downside risk that is inherent to taking a short position on stocks.

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