Information Asymmetry: Insider Trading, Reg FD, and Why Markets Have Rules

I'm Andy Temte and welcome to Money Lessons! Join me every Saturday morning for bite-sized lessons that are designed to improve financial literacy around the world. Today is June 13, 2026.

Last week, we explored short selling—the practice of borrowing shares, selling them, and hoping to buy them back at a lower price. Along the way, I noted that short sellers often act on information that other market participants don't have. Sometimes that information is the product of careful research. Sometimes it comes from leaked documents, careless conversations, or tips from people who shouldn't be sharing what they know. That raises a much bigger question, and it's the one we're tackling today: who knows what in the stock market, and when? Welcome to information asymmetry—the gap between what some market participants know and what others know—and the rules that try to keep that gap from getting too wide.

What Information Asymmetry Is

In any market, information is power. Stock prices move because people act on what they know—earnings reports, product launches, lawsuits, mergers, economic data, gossip overheard in an elevator. Whoever has better information, sooner, has an advantage. That's information asymmetry in a single sentence.

Some information gaps are unavoidable, and even productive. An analyst who spends two years studying the semiconductor industry will know more about chip companies than a casual investor checking the news on their phone. That asymmetry is the reward for doing the work, and it's part of how markets discover prices in the first place.

Other gaps are corrosive. When a corporate executive learns that next quarter's earnings will miss expectations and quietly sells stock before the announcement, that's not skill—that's cheating. The line between productive information gaps and corrosive ones is where market rules live, and it's the line we'll walk today.

The Specialist's Book

Some information advantages aren't a scandal at all. They're built into the architecture of the market itself.

Back in our March 14th episode on the bid-ask spread, we met the New York Stock Exchange specialist. Each specialist was assigned specific stocks and stood at a designated post on the trading floor, charged with maintaining a fair and orderly market. Specialists had exclusive access to the "book"—the record of every pending buy and sell order for the stocks they handled. No one else could see that book. They could see, in real time, the entire supply-and-demand picture for their assigned shares, while everyone else in the market was guessing.

That wasn't insider information in the legal sense. No one was breaking the law. The advantage came from the structure of the market, and it's a major reason specialist firms were among the most profitable on Wall Street for more than a century.

Today's electronic markets have narrowed that gap considerably. Designated market makers—the modern descendants of the specialist—still see order flow that retail investors don't. The architecture has changed; the principle hasn't. Some asymmetries are baked in.

Buy-Side and Sell-Side

Two terms you'll hear thrown around on financial television deserve a quick definition, because pundits use them constantly to sound knowledgeable, and the actual distinction is simpler than they make it sound.

A sell-side analyst works for a brokerage or investment bank. Their job is to publish research—reports on companies and industries that the firm's clients read. The research is meant to drive trading activity at the firm, because that's how the firm earns commissions and fees. Sell-side research often reaches brokerage clients before it reaches the general public.

In contrast, a buy-side analyst works for the firms that buy and hold securities—mutual funds, pension funds, hedge funds, insurance companies. Their research stays internal. It informs the buying decisions of the firm they work for, and the public never sees it.

Notice the asymmetry. Who the research is for shapes who sees it first. Sell-side reaches paying clients before the public. Buy-side never reaches the public at all. The retail investor sitting at home with a smartphone is, by design, downstream of both.

The Line That Can't Be Crossed

Insider trading is the corrosive kind of information asymmetry, and it has a specific legal meaning. It is illegal to trade in a company's securities while in possession of material nonpublic information about that company. "Material" means the information would matter to a reasonable investor's decision. "Nonpublic" means it hasn't been broadly released.

Corporate insiders—officers, directors, and shareholders who own more than ten percent of a company's stock—are required to report their trades to the SEC, where anyone can look them up. That reporting requirement exists precisely because insiders have the most natural access to material nonpublic information, and transparency about their trading is the first defense against abuse.

The prohibition reaches further than the insiders themselves. Take the case of Rajat Gupta, a former Goldman Sachs board member who in September of 2008 sat in on a private board call where directors learned that Warren Buffett was about to invest five billion dollars in the bank. Within seconds of the call ending, Gupta phoned his friend Raj Rajaratnam, a hedge fund manager. Rajaratnam bought tens of millions of dollars of Goldman stock before the news became public. Both men went to federal prison—Rajaratnam for eleven years, Gupta for two. The law punishes both ends of the chain: the tipper who shared the information, and the tippee who traded on it.

Reg FD and Leveling the Field

For most of the twentieth century, public companies routinely held private calls with favored Wall Street analysts and large institutional investors. Material information—the kind that moves stock prices—would flow first to that select audience, then days or weeks later to the broader investing public. By the time a retail investor learned about a company's slowing growth or a new product delay, the professionals had already traded on it.

In August of 2000, the Securities and Exchange Commission adopted Regulation Fair Disclosure, known as Reg FD. The rule is simple in concept. When a publicly traded company discloses material information, it must release that information to everyone at the same time. The mechanism is typically an SEC filing—usually a Form 8-K—or a widely distributed press release that any investor can access.

Reg FD didn't eliminate information asymmetry. Companies still hold conference calls; analysts still ask sharper questions than retail investors can; institutional investors still have research budgets a retail investor can't match. What Reg FD did was end the worst of the selective disclosure—the private heads-up to favored clients before the rest of the market got the news. The rules narrow the gap. They don't close it.

What This Means for You

The retail investor is structurally on the wrong side of many information asymmetries, and no amount of personal effort will change that. The professionals have more time, better tools, deeper access, and faster connections. Pretending otherwise is the surest way to lose money.

A few thoughts that follow from this. Be skeptical of anyone who claims they have an edge—the hot stock tip, the can't-miss trade, the friend who heard something from someone who heard something. If the information is genuinely material and genuinely nonpublic, acting on it can be illegal. If it isn't material or nonpublic, then it isn't an edge at all.

More usefully, focus on what you can control. Costs, diversification, time horizon, behavior. None of these require an information advantage, and all of them have a much more reliable relationship to long-term returns than chasing inside knowledge ever will. The investors who do best over decades are rarely the ones who knew the most. They're the ones who didn't kid themselves about how much they knew.

Next week, we'll bring much of the equity arc together with one of the strangest market events in modern memory. The 2021 GameStop episode—where leverage, short selling, information asymmetry, and market plumbing collided in ways that exposed structures most investors didn't know existed.

Until next week... Grace. Dignity. Compassion.