Gary Aguirre
Sep 6, 2018 · 2 min read

Hi Asbjørn,

Thanks for your question how securities trading over blockchain technology would deter insider trading. You suggest that anonymity of the private key’s holder would undermine any deterrence. Not so!

The simple answer boils down to this: the public key in the hands of anyone who understands how to conduct an insider trading investigation would likely be sufficient to obtain the facts necessary to initiate a civil action or trigger an SEC Enforcement proceeding against the trader. Moreover, the investigation could be done electronically in seconds with a software program.

Let’s use an example, the insider trading investigation of Pequot Capital Management, the subject of a Senate report: http://pogoarchives.org/m/er/senate-pequot-report-august2007.pdf. After the public announcement that General Electric would acquire Heller Financial, HF’s stock price leaped 50% and GE’s fell. The NYSE’s Market Surveillance unit detected huge purchases of HF stock, but the identity of the buyers was unknown. The NYSE contacted the broker dealer and ascertained that PCM had done the trades. The NYSE referred the matter to the SEC where it was assigned to me. Trading records also showed that PCM also shorted GE shortly before the announcement, another factor pointing to insider trading.

Tapping into the blockchain records of these trades, a software program could collect the same information — the huge longs and shorts — in seconds. Those trades would identify the public key. The lack of prior blockchain trades in GE and HF increases the probability of insider trading.

Now it’s time to unmask the identity of the trader. Let’s assume for a moment that the insider trading was being done in tokens over an SEC-approved alternative trading system. Two entities would know the identity of the holder of the public key: (1) the issuer and (2) the broker dealer owning the ATSs. A whistleblower or class action law firm investigating would have several options: (1) package the facts in a whistleblower complaint filed with the SEC, (2) press the issuer to pursue a civil action against the trader; or (3) bring a derivative action against the trader as a John Doe and amend the complaint with the true identity when it is ascertained through discovery.

This increases the risk that those who trade on inside information will get a free orange jumpsuit.

    Gary Aguirre

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