How not to be a bad trader. The history of Rule 10B-5
Marchés financiers : que sont les “bonnes” relations sociales d’échange?
Le cas de la Rules 10b-5 de la Securities and Exchange Commission : une exploration de l’histoire tumultueuse des interprétations de ce texte de régulation boursière par juristes et économistes, et du débat sur le “bon” comportement sur les marché financiers.
Since 1942, the U.S. Securities and Exchange Commission regulators, jurists soon followed by judges, and economists have tried to make sense of what could read as an innocuous, seemingly stake-free paragraph reading:
Rule 10b-5: Employment of Manipulative and Deceptive Practices:"It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security."
As of 2017, more than 15,000 federal courts cases have mobilised and interpreted this rule.
“How not to be a bad trader” project investigates the history of the moving interpretation of the "Rule 10b-5: Employment of Manipulative and Deceptive Practices" of the the U.S. Securities and Exchange Commission and focus on the conflict between jurists and economists around un-reconciled versions of the good economic action.
This project grows out of an on-going interest in exploring how intention and action are described, evaluated and regulated on financial markets (Hertz & Lépinay, Outeractionism). It looks at how experts – legislators, judges, regulators and law professors – solve the normative problem of what is inside and what is outside markets: what forms of behavior and intentionality do laws and courts exclude, in law if not in fact, as legitimate forms of action on these markets. It focuses on the notion of “fraud”, for fraud represents a form of market activity that is clearly off-limits. Fraud is a concept with a 3000 year-old legal-economic existence, a concept that seeks to delimit the permissible forms for social relations of exchange. Financial markets are particularly interesting territories for exploring this concept as they are characterized by massive amounts of collective activity in which much of what are classically understood as “social relations” are reduced to their seemingly most impoverished form. “Market relations” in and on financial markets are mediated by brokers, advertisers, accountants, algorithms and price to such a degree that the law must struggle actively to find “behavior” that has sufficient attributes of intentionality so as to make it worth regulating.
Insider trading is a case in point for a study of financial fraud. It deals with a central question of the organization of market: how should information be made public so that market participants be on an equal footing when they are in unequal functional position? Should managers be allowed to trade on the basis of information that they alone possess to speed up the diffusion of that relevant information or wait until it is public knowledge to level the playing field? This concern that regulators have had is a direct consequence of the division of property between managers and shareholders. Absent this separation, controlling and slowing down the spread of information is not relevant: a jeffersonian society of small entrepreneurs who manage and simultaneously have ownership does not struggle with defining an inside and an outside. The Securities and Exchange Act (SEA) of 1934 is passed in the context of this concern for trust and justice but soon after the Security and Exchange Commission (SEC) interprets the law into a piece of administrative statute (1942), the economic relevance and efficiency of this interpretation started to spill much ink in the economists community. Operating with different criteria of justice than jurists, economists questioned fiercely the request for full disclosure of relevant information. This debate revolved around the polysemic question of goodtrading. Doing good as a trader entailed either respect for the rules or respect for the optimality of the market. In 1962, Henry Manne, then a young jurist, provokingly titled his contribution to the debate In Defense of Insider Trading showing the rift created in the legal community by the mobilization of economics efficiency reasoning in place of fair equal access worded in the 1942 statute. The crux of the dispute stood in the definition of a market. Each side put forth a theory of the market and a theory of the traders’ motives without ever acknowledging the constructedness of the market that their point of view entailed. Although economists and lawyers have so far mostly monopolized the discussion, “How not to be a bad trader” excavates a hidden stream of scholarship that is foundational to its current topics. Pragmatist philosophers (Dewey and Mead more than Holmes) as well as philosophers of action are undercurrent and influences of the discussion of tort that frames lawyers’ ground. Information theorists have also guided most of the economists working in the field of information theory after the 1950s: they are the ferment of the co-construction of such central notions of noise and efficiency in the 1960s and 1970s.