The most interesting correlation in the stock market right now is the one between (1) the prices of airline stocks and (2) the amount of antibodies produced by coronavirus vaccine candidates in clinical trials. So far the vaccines are experimental and uncertain. If you knew that they’d work really well—protect everyone perfectly, no side effects, easy to produce, etc.—then you’d know with a pretty high degree of certainty that airline stocks (and cruise ships, hotels, casinos, retailers, etc.) would go up. If you knew that they’d be a disaster then you’d probably be short airlines.
Meanwhile let’s say you knew with certainty that one public company’s vaccine candidate would work really well. Let’s say that company was Moderna Inc., the US biotech company that has one of the leading candidates. Would you buy Moderna stock? Having a really good vaccine would probably be profitable for Moderna. But it would be tricky. It’s a high-profile situation and there will be huge pressure—from governments and maybe even shareholders—to distribute the vaccine widely and affordably. If you make a product that lots of people want, you can charge a lot of money for it and get rich; if you make a product that everyone needs, being too greedy with it might get you in trouble. A working vaccine would be good for Moderna, but it would not be an unmixed blessing.
So last week Moderna announced good news, and:
Signs of progress toward a coronavirus vaccine by Moderna propelled most corners of the stock market higher. … Most of the gains followed the release of a new study suggesting Moderna had reached a breakthrough with its coronavirus vaccine, setting the stage for a larger trial at the end of this month. Cruise-ship operators, airliners and other stocks sensitive to the coronavirus crisis led the stock market higher. Shares of Moderna rose $5.18, or 6.9%, to $80.22.
Royal Caribbean Cruises Ltd. was up 21.2%. Norwegian Cruise Line Holdings Ltd. was up 20.7%. Carnival Corp. was up 16.2%. American Airlines Group Inc. was also up 16.2%. United Airlines Holdings was up 14.6%. The biggest gainers were the vaccine-sensitive industries, not Moderna itself.
We have talked about this phenomenon from various angles before but, uncharacteristically, we have not talked about it from the insider trading angle. A reader emailed to ask:
Would it be insider trading for [Moderna] to set up a prop trading desk to buy short-dated out-of-the-money call/put options to speculate on publicly traded airlines / cruise ship / etc. companies based on its impending future publications regarding its mRNA vaccine trial results? Seems like an easy way to fund further research or pivot the business if trial fails!
Would it be insider trading for a [Moderna] researcher to buy short-dated out-of-the-money call/put options to speculate on publicly traded airlines / cruise ship etc companies based on their personal view of how the science is developing?
The thing to notice here is that if you were a Moderna scientist and you had advance knowledge of the vaccine trial results:
1. It would obviously be illegal insider trading for you to go buy call options on Moderna.
2. It would … let’s say … less obviously be insider trading for you to go buy call options on Royal Caribbean instead?
3. You would make more money with the Royal Caribbean call options.
Point 1 is, I hope, obvious. Point 3 is what we discussed above: Not only did Royal Caribbean in fact go up more than Moderna on Moderna’s news, but that was predictable. A coronavirus vaccine can only be good for Royal Caribbean’s business; it is complicated for Moderna’s.
Point 2 is my reader’s question. A related question that I get asked a lot is: If you know that Company X will announce really good earnings (because you work there, etc.), and you know that when Company X announces good earnings then Company Y stock usually goes up (because they have closely comparable businesses, etc.), can you buy Company Y stock with your inside knowledge of Company X earnings? My usual answer is:
1. This is not legal advice.
2. The US Securities and Exchange Commission will probably take the position that it’s illegal insider trading: You have nonpublic information, it is (indirectly) material to Company Y, and you have some duty of confidentiality to Company X to keep it secret.
3. But they are less likely to catch you than if you trade your own company’s stock.
4. Really, this is not legal advice!
I am tempted to say the same thing here, except that if you get rich in the stock market while working on a coronavirus vaccine, the SEC is more likely to notice. And if you brag about this being your plan they’ll definitely get mad.
This is a weird answer, by the way. Anyone who works at any company will learn things about how the world works, and that knowledge might be useful in evaluating other companies. It is fairly easy to have a rule like “if you learn something about your company that no one else knows, you can’t trade your company’s stock.” It is much harder to have a rule like “if you learn something about your company that no one else knows, you can’t make any correlated bets using that knowledge.” Everything is a little correlated; there are a lot of shades of gray there. Still I think the vaccine/airline correlation is tight enough that people would get mad about this.
On the other hand if Moderna, as a matter of corporate policy, using shareholder money, bought some airline call options before announcing its vaccine trial results, I am not sure what the objection would be? I am sure someone would object, but I don’t think it’s really insider trading. (Not legal advice!) Moderna has no fiduciary duty to the airlines’ shareholders, and has not misappropriated any information belonging to anyone else. “Insider trading,” I like to say, “is not about fairness, it’s about theft,” and there’s no theft here. Moderna knows something you don’t know, not because it cheated, but because it put in the (legitimate and socially useful!) work. Why shouldn’t it reward itself?
Of course if the trial results turned out to be misleading—if Moderna announced interim good news, but ultimately the vaccine was a dud—people would sue them for market manipulation. But that will happen anyway! If Moderna’s vaccine is a dud, after its interim announcements of good news, Moderna will definitely get sued. (“If the vaccine ends up not working, in about two months look for Moderna in the ‘Everything is securities fraud’ section of this column,” I wrote when we first talked about Moderna, two months ago.) Might as well double down on that risk? But if Moderna just bought airline stocks, announced good news, took some profits, and then produced a working vaccine, I think the only thing to do would be to applaud their creative approach to corporate finance. Not, I cannot emphasize enough, legal advice.
Bloomberg
