SSRN Id3447235

A Legal Perspective on Technology and the Capital Markets:
Social Media, Short Activism and the Algorithmic Revolution
Joshua Mitts*
In this essay, I examine the technological revolution in the capital

markets through the normative lenses of law, policy and regulation. Do
new media platforms necessarily enhance market efficiency? Or do they
facilitate fraud and manipulation of stock prices? I focus on the rise of short
activism on Twitter, Seeking Alpha and similar forms of social media: much
like a stock promoter induces others to buy so he or she can sell at a profit,
so a short activist might dupe others into selling so he or she can lock in
profits before the stock rises again.
Second, I examine the ways in which the rise of algorithmic trading
shapes the emergence of accurate prices in the capital markets, from
cybersecurity risk to limit order cancellations. There is growing evidence
that prosecutors are taking technologically induced price distortions quite
seriously. Finally, I consider emerging frontiers of technological innovation
in the capital markets. The jury is still out on whether the benefits of digital
ledger technology exceed the costs of the rampant investor deception which
has led to a steady stream of crypto prosecutions and enforcement actions.
INTRODUCTION
It is with excitement and yet some trepidation that I examine

the legal implications of the technological revolution transforming
our capital markets. Not long from now, developments which
appear to be revolutionary today will have been rendered obsolete
by the breathtaking pace of change that has come to characterize this
* Associate Professor of Law, Columbia University. This chapter has been

commissioned for the Columbia/FINRA Technology Conference at Columbia Law
School on October 4, 2019. I would like to thank the discussant, Don Langevoort,
for his comments, and Lila Nojima for outstanding research assistance. The
generous financial support of FINRA is gratefully acknowledged.
Electronic copy available at: https://ssrn.com/abstract=3447235

field. The only question is when—not if—this essay will be confined
to the dust bin of historical irrelevancy. And yet, if the past has
taught us one lesson, it is that the fundamental policy challenges
facing the capital markets have not changed very much. Utopian
visions notwithstanding, the centuries-old challenge of raising
capital in an environment of asymmetric information remains a
powerful constraint on financing valuable projects.
In this essay, I examine the technological revolution in the
capital markets through the normative lenses of law, policy and
regulation. The key question is: to what extent does ongoing
innovation further the twin policy goals of financing valuable
projects at accurate prices, which encourages efficient investment in
the real economy; and rendering secondary markets sufficiently
liquid to facilitate welfare-enhancing trade?
I begin by considering the rise of new mechanisms of digital
information transmission. A large and growing literature examines
the role of platforms like Seeking Alpha, Twitter and other social
media in conveying news to the capital markets. Like newspapers of
old, these forms of new media facilitate rapid transmission of
material, market-moving information to the investing public.1 But
does instant communication necessarily enhance market efficiency?
Or do these platforms have a dark side, facilitating fraud and
manipulation of stock prices?
A key question is the extent to which social media has
empowered so-called “negative activists”—hedge funds and other
traders who take a short position in a firm’s stock and release
negative information about the company—to induce a panicked run
on the firm. So long as the activist is a “short and hold,” riding out
Twitter-induced volatility with other shareholders, social media
attacks may indeed promote price accuracy and market efficiency.2
But when short activists close their positions rapidly, buying
while others are selling, the story begins to look like a pump-and-
1 See infra notes 11--14 and accompanying text.

2 See infra Section I.a.

dump in reverse—much like the stock promoter induces others to
buy so he or she can sell at a profit, the short activist might dupe
others into selling so he or she can cover and lock in profits before
the stock rises again.3 Technological innovation in information
transmission has made this sort of trading strategy both widely
accessible and eminently profitable. And while regulators and
courts have hesitated to interfere with the expression of market-
moving opinions, it is essential to distinguish between cases which
solely involve the exercise of speech—worthy of constitutional
protections of the highest order—and those which sound in
securities fraud, which is unprotected by the First Amendment.4
Second, I examine the different ways in which the rise of
algorithmic trading shapes the emergence of accurate prices in
markets.5 I begin by considering the challenge of trading, disclosure
and information acquisition around cybersecurity risk, one of the
greatest challenges facing public companies today. A key question is
whether inducing cyber governance should take the form of share
price changes or programs like “bug bounties” which can bring
about security improvements with fewer opportunities for trading
profits, and thus a correspondingly lower payoff.
I then consider a second way in which the rise of algorithmic
trading affects price discovery: limit order cancellations.6 Far from
an arcane topic of market microstructure, the creation and
cancellation of vast quantities of limit orders has led to substantial
disruptions in trading markets, including the flash crash of 2010.7 A
growing number of prosecutions and enforcement actions,
particularly under Section 1348 of Title 18 of the U.S. Code, shows
that prosecutors and regulators are taking technologically induced
price distortions much more seriously.8

4 See infra Section I.c.
5 See infra Section II.a.
6 See infra Section II.b.

Finally, I close by briefly considering emerging frontiers of
technological innovation in the capital markets.9 Digital ledger
technology has received substantial press, but so far, the jury is still
out on whether the benefits of non-fraudulent use cases (which are
few and far between) exceed the costs of the rampant investor
deception which has led to a steady stream of crypto prosecutions
and enforcement actions.10
Taking a step back, if the crypto wave has taught us anything,
it is that technological sophistication is not merely a nice plus but an
essential competency for an investor in today’s markets to possess.
The greatest challenge in adapting to the technological change
engulfing the capital markets might be the growing chasm between
lawyers and regulators who have a deep understanding of finance
and technology, and those who are being left behind. In this respect,
the capital markets are yet one more example of the broader change
which is transforming our society.
9 See infra Part III.

10 See infra notes 144--146.

I. INFORMATION TRANSMISSION IN A DIGITAL ERA
A rapidly growing research area in finance examines how

new forms of media transmit information in financial markets.11
Newspapers, television and radio are being rapidly supplemented
by blogs, social media and messaging applications as the primary
sources of breaking news for the equity markets.12 The role of new
media in information dissemination is driven by two fundamental
trends. The first is the increasing decentralization of the production
and consumption of news. When investors receive breaking news
11 See, e.g., Shuyuan Deng et al., The Interaction Between Microblog Sentiment and
Stock Return: An Empirical Examination, 42 MIS Q. 895, 896 (examining “the
relationship between microblog sentiment and stock returns”); Steve Y. Yang et al.,
Twitter Financial Community Sentiment and its Predictive Relationship to Stock Market
Movement, 15 QUANTITATIVE FIN. 1496, 1652 (“[T]he weighted sentiment of
[Twitter’s financial community] has significant predictive power for market
movement.”); Ilya Zheludev et al., When Can Social Media Lead Financial Markets?,
SCI. REP., Feb. 2014, 1, 10 (finding that “hourly changes in the sentiments of
[Twitter] messages lead securities’ hourly returns”) (emphasis in original); Huina
Mao et al., Quantifying the Effects of Online Bullishness on International Financial
Markets 5 (European Central Bank Statistics Paper Series, No. 9, 2015),
https://publications.europa.eu/en/publication-detail/-/publication/5adca8cf-53f7-
4d67-8af1-323003c0b213/language-en (“Twitter bullishness has a statistically and
economically significant predictive value in respect of share prices . . . .”); see also,
e.g., Paul C. Tetlock, Giving Content to Investor Sentiment: The Role of Media in the
Stock Market, 62 J. FIN. 1139, 1140 (2007) (finding that “news media content can
predict movements in broad indicators of stock market activity”).
12 See David Bauder & David A. Lieb, Decline in Readers, Ads Leads Hundreds of
Newspapers to Fold, CHI. TRIB. (Mar. 11, 2019),

https://www.chicagotribune.com/nation-world/ct-local-newspapers-dead-
20190311-story.html (reporting that in one locality without a newspaper, Facebook
posts have replaced traditional print reporting); Derek Thompson, The Print
Apocalypse and How to Survive It, ATLANTIC (Nov. 3, 2016),
https://www.theatlantic.com/business/archive/2016/11/the-print-apocalypse-and-
how-to-survive-it/506429/ (“Audiences are migrating from print bundles to mobile
networks and aggregators.”); Rhea Wessel, Activist Investors Turn to Social Media to
Enlist Support, N.Y. TIMES: DEALBOOK (Mar. 24, 2011),
https://dealbook.nytimes.com/2011/03/24/activist-investors-turn-to-social-media-
to-enlist-support.

alerts in real-time via the Twitter app on a mobile device, it seems
less necessary to read the Wall Street Journal the following morning.
The second trend is the rise of algorithmic and high-frequency
trading.13 For these market participants, speed is everything—their
business models depend on instant access to information. This, in
turn, drives increased demand for the rapid delivery of news.
In the following Sections, I discuss the implications of
technological change in the transmission of news and market-
moving analysis to the investing public. I begin by discussing the
growing empirical evidence documenting suspicious trading
patterns following social media posts. Next, I consider the welfare
implications of these findings in light of the theoretical literature on
informed trading. Finally, I consider the broader policy challenge of
regulating new forms of market-moving media platforms which
have emerged as a result of technological innovation.
a. Negative Activism on New Media
The rise of social media platforms like Twitter, Seeking Alpha,

Reddit, etc. has led to broader, faster transmission of market-moving
information. Today, anyone can post opinions and draw attention to
facts concerning publicly traded companies, which may have a
profound effect on stock prices.14 But these very same platforms
13 See Frank Chaparro, Credit Suisse: Here’s How High-Frequency Trading has Changed
the Stock Market, BUS. INSIDER (Mar. 20, 2017),
https://www.businessinsider.com/how-high-frequency-trading-has-changed-the-
stock-market-2017-3.
14 For instance, a tweet on August 7, 2018 by Tesla CEO, Elon Musk that he could
take Tesla private “caused Telsa’s stock price to jump by over six percent on
August 7.” Press Release, Sec. & Exch. Comm’n, Elon Musk Settles SEC Fraud
Charges; Tesla Charges with and Resolves Securities Law Charge (Sept. 29, 2018),
https://www.sec.gov/news/press-release/2018-226. Relatedly, short seller attacks
have had rapid and severe consequences for public companies. See, e.g.,
Complaint at 5, Farmland Partners Inc. v. Rota Fortunae, No. 18-CV-02351 (D.
Colo. July 23, 2018) (“[S]oon after [the anonymous defendant] published its
internet posting, Farmland Partners’ stock price dropped by approximately 39%.”);

have given rise to suspicious trading patterns as well. For example,
one study examined 7.1 million tweets and found that “an
abnormally high number of messages on social media is associated
with a large price increase on the event day and followed by a sharp
price reversal over the next trading week.”15 Moreover, “the price
reversal pattern is stronger when the events are generated by the
tweeting activity of stock promoters or by the tweeting activity of
accounts dedicated to tracking pump-and-dump schemes.”16
Digital assets have been particularly vulnerable to
manipulation on social media. Jiahua Xu and Benjamin Livshits
have identified over 220 pump-and-dump activities in
cryptocurrency markets organized in Telegram channels from July to
November 2018.17 Specifically, they find that “around 100 organized
Jesse Barron, The Bounty Hunter of Wall Street, N.Y. TIMES MAGAZINE (June 8, 2017),
https://www.nytimes.com/2017/06/08/magazine/the-bounty-hunter-of-wall-
street.html (noting that 15 minutes after a tweet by Citron Research, Express
Scripts lost $6 billion in market capitalization); Robert Smith & Lindsay Fortado,
Burford Capital Shares Tumbles as Muddy Waters Takes Aim, FIN. TIMES (Aug. 7, 2019),
https://www.ft.com/content/29f4ac20-b8e9-11e9-96bd-8e884d3ea203 (“The steep
declines in Burford’s shares on Wednesday followed an almost 20 per cent drop on
Tuesday, when Muddy Waters tweeted that it would be announcing a new short
position.”); Jeff Katz & Annie Hancock, Short Activism: The Rise in Anonymous
Online Short Attacks, HARV. L. SCH. F. CORP. GOVERNANCE & FIN. REG. (Nov. 27,
2017), https://corpgov.law.harvard.edu/2017/11/27/short-activism-the-rise-in-
anonymous-online-short-attacks/ (cataloguing the effects of recent online short
attacks).
15 Thomas Renault, Market Manipulation and Suspicious Stock Recommendations
on Social Media 1 (Apr. 14, 2018) (unpublished manuscript),

https://ssrn.com/abstract=3010850.
16 Id.
17 Jiahua Xu & Benjamin Livshits, The Anatomy of a Crypotcurrency Pump-and-
Dump Scheme 1 (Nov. 25, 2018) (unpublished manuscript),

https://arxiv.org/pdf/1811.10109.pdf. Similarly, Tao Li and colleagues found that
cryptocurrency pump-and-dump schemes are common and that “manipulators
often organize ‘pump’ groups using encrypted messaging apps such as
Telegram”). Tao Li et al., Cryptocurrency Pump-and-Dump Schemes 1 (Feb. 2019)
(unpublished manuscript), https://ssrn.com/abstract=3267041. See also Shane
Shifflett & Paul Vigna, Traders are Talking up Cryptocurrencies, then Dumping Them,

Telegram pump-and-dump channels coordinate on average 2 pumps
day which generates an aggregate artificial trading volume of 7
million USD a month.”18 They also found that “some exchanges are
also active participants in pump-and-dump schemes.”19
My own research has studied pseudonymous short attacks on
public companies published on the media platform Seeking Alpha.20
I find that these attacks are followed by price declines and sharp
reversals, and argue that these patterns are likely driven by
manipulative stock options trading by pseudonymous authors.21
Among 1,720 pseudonymous attacks on mid- and large-cap firms
from 2010-2017, I identify over $20.1 billion of mispricing.22 These
reversals seem to persist because pseudonymity allows manipulators
to switch identities without accountability.23 Using stylometric
analysis, I show that pseudonymous authors exploit the perception
that they are trustworthy, only to switch identities after losing
credibility with the market.24
The use of social media platforms to attack public companies
has been conceptualized more generally by Barbara Bliss, Peter Molk
and Frank Partnoy as a kind of “negative activism,” which serves a
complementary function to traditional shareholder activism.25 As
Bliss, Molk and Partnoy explain, the classical activist takes a long
position in a target company and advocates for corporate change,
often in the form of replacing senior management or embracing a
Costing Others Millions, WALL ST. J. (Aug. 5, 2018),

https://www.wsj.com/graphics/cryptocurrency-schemes-generate-big-coin/.
18 Xu et al., supra note 17 at 1.
19 Id.
20 Joshua Mitts, Short and Distort (Columbia Law & Econ. Working Paper No. 592,
2019), https://ssrn.com/abstract=3198384.
21 Id. at 2.
22 Id.
23 Id. at 1.
24 Id. at 3.
25 Barbara A. Bliss et al., Negative Activism, 97 Wash. U. L. Rev. (forthcoming)
(manuscript at 5) (on file with author).

different business strategy.26 The traditional activist sees his or her
role as increasing firm value by engaging with the board of directors
and shareholder constituency.
The negative activist, on the other hand, seeks to profit
precisely by revealing facts about the firm which suggest its share
price is over-valued, encouraging investors to sell the stock to realize
the difference between the current price and the lower, true
underlying value of the firm.27 While both activists are often critical
of the firm at the outset of their campaigns, traditional activists are
ultimately seeking to enhance, not destroy, the value of the firm.
Nonetheless, Bliss, Molk and Partnoy contend that both forms of
activism contribute to price discovery and market efficiency.28
One important difference between traditional and negative
activism is that the former is conducted primarily via direct
engagement with the board of directors and shareholder public,
whereas the latter often takes place on social media in the form of
aggressive online campaigns by a short seller against the issuer.29
Technology has thus played a critical role in the emergence of
negative activism. The rapid dissemination of information on social
media gives short activists two critical advantages.
The first is a platform: short activists are often individuals or
small funds which often lack access to traditional media outlets to
26 Id. at 5, 9—10.
27 Id. at 12—13.
28 Id. at 41—42 (“[R]egardless of whether the information is positive or negative in
nature, scholars typically view new accurate information about securities as a

good thing.”).
29 See David R. Beatty, How Activist Investors are Transforming the Role of Public-
Company Boards, MCKINSEY & CO. (Jan. 2017),

https://www.mckinsey.com/business-functions/strategy-and-corporate-
finance/our-insights/how-activist-investors-are-transforming-the-role-of-public-
company-boards (describing traditional activists’ engagement with public
company boards); Katz & Hancock, supra note 14 (noting a shift from “prominent
hedge funds and ‘celebrity’ activists . . . [who] launch short attacks capitalizing on
their notoriety and name recognition” to individuals who post anonymously
online).

broadcast their negative message about a company.30 Hence the
popularity of Seeking Alpha and other forums which allow short
activists to publicize their views without the time and expense of
convincing traditional media. The rise of pseudonymity is
interwoven with this trend, as an activist refusing to divulge his or
her identity would likely receive no coverage in the traditional press,
but is welcomed on platforms like Seeking Alpha.31
The second is the nature of the profits. Negative activism is,
at its core, a trading strategy. The short activist opens a short
position, attacks the company, and closes the position after the stock
decline. To be sure, some have critiqued traditional activists for
effectively implementing a similar kind of trading strategy in
reverse: opening a long position, announcing the activist stake, and
then selling after the price increase.32 But few would disagree that
30 For example, Ben Axler of Spruce Point Capital Management, one of the most
successful short sellers in 2018, has “just three full-time employees operating out of
[a] shared office.” Michael P. Regan, The Tiny Activist that Reaped 24% Return by
Unearthing ‘Cockroaches,’ BLOOMBERG (May 20, 2019),
https://www.bloomberg.com/news/features/2019-05-20/the-tiny-activist-fund-that-
reaped-24-return-by-unearthing-cockroaches.
31 See Mitts, supra note 20 at 29; Eli Hoffmann, Why Seeking Alpha Embraces
Pseudonymity, SEEKING ALPHA (Mar. 19, 2014),

https://seekingalpha.com/article/2096573-why-seeking-alpha-embraces-
pseudonymity.
32 See Ed deHaan et al., Long-Term Consequences of Hedge Fund Activist Interventions,
24 REV. ACCT. STUD. 536, 537, 542 (2019) (summarizing the debate over hedge fund
activism and finding “no evidence that activist interventions induce long-term
improvements in a broad set of accounting-performance variables”); Mary Jo
White, Chair, Sec. & Exch. Comm’n, Speech at the Tulane University Law School
27th Annual Corporate Law Institute: A Few Observations on Shareholders in 2015
(Mar. 19. 2015), https://www.sec.gov/news/speech/observations-on-shareholders-
2015.html#_ftnref7 (commenting on the shareholder activism debate and stating
that “it is time to step away from gamesmanship and inflammatory rhetoric that
can harm companies and shareholders alike”); James Surowieki, When Shareholder
Activism Goes Too Far, NEW YORKER (Aug. 14, 2013),
https://www.newyorker.com/business/currency/when-shareholder-activism-goes-
too-far. But see Lucian Bebchuk et al., The Long-Term Effects of Hedge Fund Activism,
115 COLUM. L. REV. 1085, 1090 (2015) (“[T]here is no evidence that activist
10

traditional activists primarily seek to engage the company in making
fundamental changes to its management and business strategy.
To be sure, these operational changes may provide valuable
trading opportunities to hedge fund activists,33 but those are
arguably secondary to the activist’s chief mission: namely, inducing
operational changes that, in its view, enhance the fundamental value
of the firm. On the other hand, negative activism proceeds from the
premise that the firm’s share price is too high relative to its
fundamental value.34 That is, the role of the short activist is not to
agitate for corporate change but simply to exploit the trading
opportunity presented by such transitory mispricing—and indeed
often to induce such a trading opportunity by notifying the world of
the short position on social media, and rapidly close out the position
upon the price decline in order to lock in a profit.
The fact that technological innovation plays a critical role in
bringing about the trading profits at the core of emerging
phenomena like short activism illustrates challenge that online
platforms pose for securities law today. Once upon a time, the law
focused on informed trading by corporate insiders, under the theory
that they were the ones most likely to possess market-moving
information about the value of a stock. But now contributors to
platforms like Seeking Alpha and Reddit forums may be just as
capable of moving stock prices. How should prohibitions on market
manipulation evolve in an era of instant information transmission?
interventions produce short-term improvements in performance at the expense of

long-term performance.”); Alon Brav et al., The Real Effects of Hedge Fund Activism:
Productivity, Asset Allocation, and Labor Outcomes, 28 REV. FIN. STUD. 2723, 2763
(2015) (finding “hedge fund intervention is associated with productivity gains at
the plants of the targeted companies”).
33 See John C. Coffee et al., Activist Directors and Agency Costs: What Happens When
an Activist Director Goes on the Board?, 104 CORNELL L. REV. 381, 455 (2019) (finding
that “[o]nce a hedge fund employee goes on the board, informed trading is the
norm, not the exception.”).
34 Bliss et al., supra note 25, at 12 (“[I]informational negative activism behavior . . .
seeks to uncover and then communicate the truth about companies whose shares
the activists believe are overvalued.” (emphasis omitted)).
11

b. Announcement Trading and Market Manipulation
In their work on informed trading and its regulation, Merritt

Fox, Larry Glosten and Gabriel Rauterberg distinguish between
fundamental value trading—buying or selling a stock based on the
collection and analysis of information about a firm—and
announcement trading—trading ahead of public announcements in a
race to be first and thereby collect the profits from buying before a
price increase (good news) or selling before a price decline (bad
news).35 Fox et al. make the point that while the distributional
(fairness) consequences of announcement and fundamental value
trading are identical, the efficiency implications are not.36
In particular, while both reduce liquidity and thereby raise
the cost of capital for issuers (as with any form of informed trading),
fundamental value trading tends to enhance price accuracy over the
long run, which improves capital allocation and thus has positive,
offsetting welfare effects.37 On the other hand, Fox et al. argue that
announcement trading improves price accuracy for such a brief
period of time that the welfare gains are likely to be quite minimal
and outweighed by the loss of liquidity from this form of informed
trading, which could be quite severe.38
The distinction between fundamental value and
announcement trading sheds light on the welfare implications of
disseminating market-moving information on social media. Online
short activists often claim to post content which is relevant to the
fundamental value of the firm. The social benefits of such activity
are most cogent so long as these authors are not engaging in
announcement trading—i.e., opening a position with minimal price
impact, inducing a price change and quickly closing the position to
lock in profits, regardless of whether the price ultimately reverses.
35 Merritt B. Fox et al., Informed Trading and its Regulation, 43 J. CORP. L. 817, 835—
36, 846 (2018).
36 Id. at 841—847.
37 Id. at 843.
38 Id. at 850, 853.
12

The concern that social media facilitates announcement
trading is consistent with the empirical evidence discussed
previously—namely, that price changes in response to social media
posts are often transitory and subsequently reverse.39 In any given
case, only regulators are able to observe whether an activist rapidly
closed his or her position upon posting market-moving content prior
to the reversal which is expected based on the available evidence.
While such opportunistic trading may or may not be illegal under
present law, it certainly constitutes the sort of announcement trading
which securities regulation should seek to discourage.
What sort of policy might discourage market participants
from exploiting the rapid delivery of information to engage in
transitory announcement trading? A natural starting point is the law
of market manipulation. Section 9(a)(2) of the Securities Exchange
Act of 1934 prohibits trading for the purpose of inducing others to
buy or sell.40 Decades ago, in In the Matter of Halsey, Stuart, the SEC
held that “one who accumulates at rising prices and sells out at
prices created by his buying efforts will be presumed to have raised
prices for the purpose of inducing others to buy.”41 While this
presumption is rebuttable, it shifts the burden of proving non-
manipulative intent to the defendant.
There are good reasons for regulators and enforcement
authorities to apply this presumption to trading behavior in modern
capital markets. In effect, this rule intuitively combines a sort of
“tick test,” i.e., a prohibition on rapid trading in opposite directions,
with a “price impact” component: having affected the price in one
direction, one must be willing to refrain from closing the position
until the market has independently settled on that price as the
accurate price. To do otherwise is, at the very least, weakly
probative of manipulative intent.
39 See supra note 20.

40 15 U.S.C. § 78i (2012).
41 Halsey, Stuart, Exchange Act Release No. 4310, 1949 WL 36458 (Sept. 21, 1949)
(citing Opinion of General Counsel, Exchange Act Release No. 3056, 1941 WL
37714 (Oct. 27, 1941)).
13

To see why, consider the following example. Suppose that a
stock is currently trading at $10 per share, and an online activist
accumulates a large short position, subsequent to which he or she
posts a tweet arguing that the true value of the firm is $8. The stock
price rapidly falls to $8, yielding the activist a substantial profit, at
which point he or she closes her position. Regardless of whether the
stock price subsequently remains at $8 or not, the activist’s trading
pattern, at the very least, is weakly suggestive of manipulative intent.
Which of these possibilities is consistent with the evidence: (a) the
activist believes the stock is worth more than $8, (b) the activist
believes the stock is worth less than $8, or (c) the activist believes the
stock is worth $8?
Let’s start with the first case. Closing the position at $8 is
fully consistent with believing the stock is worth more than $8. After
all, the activist had a short position; he or she induced a price
decline; and closing out the position is the way to monetize those
gains. Such a strategy would be a brazen attempt to take advantage
of those investors who sold at prices between $8 and $10 in response
to the online post. As Jack Coffee and I have discussed at length,
trading behavior which suggests that an opinion is not genuinely
held likely violates the standard articulated by the Supreme Court in
Omnicare as to when an opinion is misleading,42 and lower courts
have extended this standard to Rule 10b-5.43
Now consider the second possibility. Is it possible that the
activist believes the stock is actually worth less than $8? Unlikely,
because then closing the short position at $8 would be irrational:
after all, the activist could have made more profits by holding on to
42 John C. Coffee, Jr. & Joshua Mitts, Short Selling and the New Market Manipulation,
CLS BLUE SKY BLOG (Mar. 18, 2019),
http://clsbluesky.law.columbia.edu/2019/03/18/short-selling-and-the-new-market-
manipulation/.
43 See City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Align Tech., Inc.,
856 F.3d 605, 610 (9th Cir. 2017); Tongue v. Sanofi, 816 F.3d 199, 209—10 (2d Cir.
2016); Nakkhumpun v. Taylor, 782 F.3d 1142, 1159—60 (10th Cir. 2015); Michael D.
Moritz, The Advent of Scienterless Fraud? Applying Omnicare to Section 10(b) and Rule
10b-5 Claims, 13 J. L. & BUS. 595, 608—16 (2017).
14

the short position longer. The second possibility is thus contradicted
by the trader’s own behavior. Finally, consider the third possibility:
the activist believes the stock is worth $8. Then he or she should be
indifferent between holding the position or closing it. In that case,
we can conclude nothing from the choice of closing the position—
doing so is simply a coin flip from the standpoint of the activist.
Taken together, we obtain the following conclusion: closing
the position is consistent with either genuine, non-manipulative
intent, as well as manipulative intent to induce and exploit a
transitory price reversal. On the other hand, holding the position is
consistent with the former but not the latter: a short seller who
genuinely believes the stock is worth $8 is no worse off by holding
the stock once it reaches that price, and can only do strictly better if
the price falls further.
Viewed in this light, a rule that requires traders to hold a
position until the market has reached a consensus as to the value of
the stock can be justified under the rational view that to do
otherwise is weakly suggestive of manipulative intent. This is
consistent with the Second Circuit’s pronouncement that the
prohibition on manipulation under Rule 10b-5 “seeks a market
where competing judgments of buyers and sellers as to the fair price
of the security brings about a situation where the market price
reflects as nearly as possible a just price.”44 To the extent that one
moves prices in one direction and closes the position before the
market reaches a consensus as to the value of the stock, the price
does not reflect the “competing judgments of buyers and sellers.”
One might object to the Halsey, Stuart presumption on the
view that it is difficult to determine when the market has reached a
consensus as to the true value of information, and the uncertainty
that would arise from such a policy might have a strong chilling
effect on the dissemination of market-moving information.
Moreover, activists are often undiversified with respect to target
44 ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 101—02 (2d Cir. 2007).
15

firms and thus likely to be averse to the idiosyncratic risk that would
arise from holding the stock over a long period of time.
The concern that it is difficult to identify a point in time when
markets have had a chance to digest information is a compelling one.
It does not follow, however, that policymakers should adopt a
passive view that this sort of announcement trading is permitted—
i.e., that online activists may freely post content which moves stock
prices and immediately close their positions. The question is
whether a rule which allows such trading is superior to a rule which
imposes a minimum holding period, weighing the costs and benefits
of each approach.
First, consider a rule which allows announcement trading on
market-moving online posts. The benefit of such a rule is that
author-traders obtain near-certain profits: so long as they are
successful at inducing an immediate price change, however short-
lived, and can rapidly liquidate their position, they are likely to
obtain a profitable payoff. Indeed, a cursory examination of the
evidence suggests that in many cases, there is strong contra-
directional trading immediately after an online post on Twitter or
Seeking Alpha—i.e., buying into a price decline and selling into a
price increase.45
While only regulators with deanonymized data can be certain,
in any given case, whether these trades consist of online activists
closing their position, it seems likely that this is occurring in some
cases. This sort of trading on induced price changes clearly yields
substantial profits. Of course, the costs of such behavior are
nontrivial. As with any form of informed trading, bid/ask spreads
are expected to widen, leading to a higher cost of capital for issuers
and reducing welfare-enhancing secondary market trades.46
Now consider an alternative rule which imposes a cooling off
period, say, of one day, following a market-moving post on social
media. This increases, to some extent, the risk faced by an activist
45See Mitts, supra note 20, at 15—17.

46See Lawrence R. Glosten & Paul R. Milgrom, Bid, Ask and Transaction Prices in a
Specialist Market with Heterogeneously Informed Traders, 14 J. FIN. ECON. 71 (1985).
16

seeking to close out their position—it is possible that the price
change will reverse direction and move against the activist within
that 24-hour period. For this reason, such a rule is likely to chill
online activism which is followed by rapid price reversals. But that
is a feature, not a bug: it is precisely those price changes which
quickly reverse which are the least meaningful in terms of revealing
the fundamental value of the firm. Deterring announcement trading
on rapidly reversing price changes is likely to increase market
liquidity without harming price discovery—and that is exactly the
policy goal that securities regulation should seek to advance.
Put differently, applying the Halsey, Stuart presumption to
trading in advance of and following the posting of content on digital
media platforms is likely to bring about substantial benefits, while
imposing few costs. Recall that Halsey, Stuart is merely an
evidentiary presumption: the rule does not prohibit rapidly closing
one’s position following a market-moving post on social media, but
merely shifts the burden of proof to the defendant, requiring that he
or she establish a non-manipulative purpose to the trade. One
example of rebutting the presumption might be the presence of
“counter-manipulation”—e.g., an attempt by the company to
positively push its share price upward after a short report. That is
the sort of evidence which could be brought to bear to rebut the
Halsey, Stuart presumption that rapidly closing out one’s position
after moving the price reflected an intent to manipulate the market.47
c. Regulating the Online Expression of Market-Moving Opinion
Taking a step back, one way to view the rising impact of new
forms of media technologies is that the expression of opinion by
market participants now has a far more powerful effect on stock
prices than was previously the case. Once upon a time, the policy
narrative around the regulation of the secondary capital markets
focused heavily on the production of information by public
47 Exchange Act Release No. 4310, 1949 WL 36458 (Sept. 21, 1949).
17

companies.48 Consider, for example, insider trading law, which has
traditionally constituted a cornerstone of securities regulation. When
courts and regulators referred to “material, nonpublic information,”
they often had in mind new facts originating from within the public
company—e.g., an earnings announcement, pending merger, new
customer agreement, and so forth.49
In the classical paradigm, when the publication of opinions
about public companies did move market prices, this generally took
place through the exercise of traditional journalism such as stock
analysis, whistleblower investigations, and in-depth reporting.
These were viewed as enhancing market efficiency by bringing
attention to the underlying issues (both good and bad) which affect
the share prices of public companies. Market manipulation was
seldom raised as a concern because journalists adhered to ethical
codes which strictly prohibited acquiring a position in a stock which
would yield the journalist a profit as a result of the market reaction
to the information conveyed in the article.50
48 For historical examinations of the disclosure regime, see Allison Grey Anderson,
The Disclosure Process in Federal Securities Regulation: A Brief Review, 25 HASTINGS
L.J. 311, 328 (1974); Joel Seligman, The Historical Need for a Mandatory Corporate
Disclosure System, 9 J. CORP. L. 1, 18—33 (1983).
49 See, e.g., U.S. v. Chiarella, 588 F.2d 1358, 1362—64 (finding an employee of a print
shop with advance notice of a tender offer liable for insider trading); Sec. & Exch.
Comm'n v. Texas Gulf Sulphur Co., 401 F.2d 833, 852 (2d Cir. 1968) (focusing on
information obtained by employees of a public company).
50 See, e.g., Patrick McGeehan, CNBC Disclosure Stirs Ethics Debate in Business Media,
N.Y. TIMES (July 28, 2003), https://www.nytimes.com/2003/07/28/business/media-

cnbc-disclosure-stirs-ethics-debate-in-business-media.html (discussing ethical
standards at various business news outlets); Code of Ethics, SOCIETY OF AMERICAN
BUSINESS EDITORS AND WRITERS, https://www.asne.org/resources-ethics-sabew (last
visited Aug. 13, 2019) (“Do not take advantage of inside information for personal
gain.”); Ethical Journalism, N.Y. TIMES, https://www.nytimes.com/editorial-
standards/ethical-journalism.html# (last visited Aug. 13, 2019) (“Staff members
may not buy or sell securities or make other investments in anticipation of
forthcoming articles that originate with The Times.”); Ethics and Standards Policy,
PULITZER CENTER, https://pulitzercenter.org/about-us/ethics-and-standards-policy
(last visited Aug. 13, 2019) (“Avoid financial conflicts of interest with
organizations you regularly cover. You should not own stock directly in, work for
18

And to the extent these ethical codes were violated, the chief
theory seemed to be one of insider trading and misappropriation.
Consider, for example, Carpenter v. U.S., in which the harm was
conceived not in terms of defrauding the investing public in a direct
sense, but simply in terms of a journalist (Winans) stealing market-
moving information from his employer (the Wall Street Journal).51 As
with any misappropriation case, there is no question that the Journal
itself was entitled to trade on the market-moving information to be
published in the investment advice column that Winans authored.52
Against the backdrop of this traditional framework, the legal
response to the potentially manipulative expression of opinion in
new media evolved along two primary avenues. The first has been
an ever-increasing body of enforcement precedent against positive
media campaigns—typically under anti-touting rules and the
application of general antifraud law to pump-and-dump schemes.53
or receive other economic benefits from a company you regularly report on or

make news decisions about.”). Cf. Dean Starkman, What is Financial Journalism
For?, COLUM. JOURNALISM REV. (Jan. 13, 2009),
https://archives.cjr.org/the_audit/post_153.php (noting the potential for ethical
conflicts when money managers, rather than traditional reporters, offer “widely
read, often highly literate, commentary on financial issues in which they may or
may not have a stake”).
51 Carpenter v. U.S., 484 U.S. 19, 25—27 (1987).
52 Id. See also U.S. v. O’Hagan, 521 U.S. 642, 652 (1997) (“Under [misappropriation]
theory, a fiduciary's undisclosed, self-serving use of a principal's information to

purchase or sell securities, in breach of a duty of loyalty and confidentiality,
defrauds the principal of the exclusive use of that information.”).
53 See, e.g., Press Release, Sec. & Exch. Comm’n, Payments for Bullish Articles on
Stocks Must be Disclosed to Investors (Apr. 10, 2017),

https://www.sec.gov/news/press-release/2017-79 (announcing enforcement actions
against individuals and entities for “being secretly compensated for touting
company stocks”); Press Release, Sec. & Exch. Comm’n, SEC Charges Microcap
Fraudsters for Roles in Lucrative Market Manipulation Schemes (Sept. 7, 2018),
https://www.sec.gov/news/press-release/2018-182 (charging participants in a
pump-and-dump scheme with violating antifraud provisions); Sec. & Exch.
Comm’n, SEC Statement Urging Caution Around Celebrity Backed ICOs (Nov. 1,
2017), https://www.sec.gov/news/public-statement/statement-potentially-
unlawful-promotion-icos (stating that failing to disclose compensation for
19

A case which typifies this approach is the recent SEC enforcement
action in the matter of Lidingo Holdings.54
In that case, the defendant, Lidingo Holdings (“Lidingo”)
hired writers to publish positive articles for their clients on
investment websites like Seeking Alpha under pseudonymous
author names like “VFC’s Stock House.”55 The authors failed to
disclose their own compensation from Lidingo as well as Lidingo’s
compensation by its clients for the stock-promotion service.56 The
SEC sued Lidingo and the authors under Section 17(b) of the
Securities Act of 1933, which prohibits promoting a security for
consideration “without fully disclosing the receipt . . . of such
consideration and the amount thereof,” as well as under Rule 10b-5
for the misleading omission.57
This framework provides a useful but somewhat limited
toolkit to deter manipulative expression of opinion on new forms of
media, chiefly because it focuses solely on the narrow issue of
omitted compensation disclosure. In Lidingo, the SEC did not take
issue with pseudonymity per se, nor did it argue that the content of
the positive coverage was misleading. As I will discuss shortly, the
SEC did call out trading patterns which suggested a deceptive
intent.58 But the content of the posts was not the focus of the SEC’s
complaint in Lidingo.
Another chief limitation of the Lidingo approach is that Section
17(b) may not extend to short-side attacks on a firm, which
encourage selling, not purchasing, a security.59 And this brings us to
endorsements “is a violation of the anti-touting provisions of the federal securities

laws” and may be a violation of the anti-fraud provisions of such laws).
54 Complaint, Sec. & Exch. Comm’n v. Lidingo Holdings, No. 17-CV-02540
(S.D.N.Y. Apr. 10, 2017).

55 Id. at 2—3, 12—35.
56 Id.
57 Id. at 37—38.
58 Id. at 22—23.
59 “[T]here is no analogue statute to Section 17(b) requiring an author of a negative
article to disclose if he is being paid by short interests, or would benefit from a fall
in the stock price.” Michael Dicke, SEC Crackdown on “Fake News” is Itself Fake News
20

the second way that the legal community has responded to
potentially manipulative expressions of opinion in new forms of
media: defamation actions. Targets of short-side attacks often sue
authors—and attempt to obtain discovery of pseudonymous
identities from Seeking Alpha—under a defamation theory.60 But,
save for a few exceptions, these efforts have largely failed.61
In perhaps one of the most well-known cases, Nanoviricides v.
Seeking Alpha, the New York Supreme Court for New York County
rejected a discovery motion brought against Seeking Alpha to reveal
the identity of a pseudonymous author, “The Pump Terminator,”
concluding that “the alleged defamatory statements identified in the
petition constitute protected opinion and are not actionable as a
(Perspective), BLOOMBERG LAW: BIG LAW BUSINESS (Apr. 21, 2017),

https://biglawbusiness.com/sec-crackdown-on-fake-news-is-itself-fake-news-
perspective/.
60 See, e.g., Complaint, St. Jude Medical, Inc. v. Muddy Waters Consulting LLC, No.
16-CV-03002 (DWF)(BRT) (D. Minn. Sept. 7, 2016); Matthew Goldstein, Hedge Fund
Suit Seeks Identity of Anonymous Blogger, N.Y. TIMES: DEALBOOK (Feb. 18, 2014),
https://dealbook.nytimes.com/2014/02/18/hedge-fund-suit-seeks-identity-of-
anonymous-blogger/; Charley Grant, CEO Faces Off with Short Seller in Libel Suit,
WALL ST. J. (July 29, 2016), https://www.wsj.com/articles/ceo-faces-off-with-short-
seller-in-libel-suit-1469812949.
61 For examples of successful target company actions, see, e.g., Amira v. Prescience
Point LLC, Case No. 15-CV-09655-VEC, ECF Doc. 66 (S.D.N.Y., Oct. 17, 2016) (I
think that the plaintiffs have barely pushed over
the line. Amira adequately alleges facts, although just barely, to state a plausible
claim for defamation.”) Deer Consumer Prod., Inc. v. Little, 938 N.Y.S.2d 767, 782
(Sup. Ct. 2012) (finding that “the First Amendment does not bar disclosure of
Little's identity” for purposes of jurisdictional discovery); Overstock.com, Inc. v.
Gradient Analytics, Inc., 151 Cal. App. 4th 688 (2007) (denying short sellers’ appeal
to strike defamation claim on anti-SLAPP grounds and finding target company
demonstrated likelihood of prevailing on defamation claim). However, courts
have generally sided with the defendants. See, e.g., Sparrow Fund Mgmt. LP v.
MiMedx Grp., Inc., No. 18-CIV-4921 (PGG)(KHP), 2019 WL 1434719 (S.D.N.Y. Mar.
31, 2019) (dismissing target company’s defamation suit against short sellers);
Silvercorp Metals Inc. v. Anthion Mgmt. LLC, No. 150374/2011, 2012 WL 3569952
(N.Y. Sup. Ct. Aug. 16, 2012) (same).
21

matter of law.”62 In this and subsequent defamation litigation, courts
have generally found that short-seller attacks are entitled to
constitutional protection under the First Amendment, absent a
clearly false factual statement.63 Courts have refused to allow targets
of short seller attacks to bring defamation suits under the theory that
the opinion itself is in some way misleading, regardless of the effect of
the content on the share price.64
The resistance to allowing defamation suits to proceed has
both a doctrinal and conceptual dimension. At the doctrinal level,
U.S. defamation law imposes high burdens to establishing a
defamation claim for online speech, requiring, for example, that a
plaintiff plead actual malice when alleging defamation against a
public figure, which would seem to encompass most publicly traded
companies.65 More generally, statements of “pure opinion” are
simply not actionable in a defamation claim.66 This view is rooted in
62 Nanoviricides, Inc. v Seeking Alpha, Inc., No. 151908/2014, 2014 WL 2930753, at

*5 (N.Y. Sup. Ct. June 26, 2014).
63 Id. at *3—4 (noting that defamation is based on assertions that can be proven
false). See also Silvercorp Metals Inc. v. Anthion Mgmt. LLC, No. 150374/2011, 2012
WL 3569952, at *3 (N.Y. Sup. Ct. Aug. 16, 2012) (noting that the target company
failed to allege that any statements were false).
64 See, e.g., MiMedx Grp., Inc. v. Sparrow Fund Mgmt. LP, No. 17-CV-07568
(PGG)(KHP), 2018 WL 847014, at *7 (S.D.N.Y. Jan. 12, 2018), report and

recommendation adopted, No. 17 CIV. 7568 (PGG), 2018 WL 4735717 (S.D.N.Y. Sept.
29, 2018) (cataloging cases in which defamation suits have been dismissed despite
impact on share price).
65 See id. at *6 (“When the plaintiff is a public figure, such as a public company, the
plaintiff must demonstrate that the defendant acted with ‘actual malice’ in
connection with the defamatory statements) (quoting New York Times Co. v.
Sullivan, 376 U.S. 254, 279—80 (1964)); Fairfax Fin. Holdings v. S.A.C. Capital
Mgmt., 160 A.3d 44, 108–09 (N.J. Sup. Ct. App. Div. 2017) (explaining when
business entities have been categorized as public figures). But see Computer Aid,
Inc. v. Hewlett-Packard Co., 56 F. Supp. 2d 526, 535 (E.D. Pa. 1999) (finding that a
corporation may be, but is not necessarily, a public figure).
66 See Hotchner v. Castillo-Puche, 551 F.2d 910, 913 (2d Cir. 1977) (“Under the First
Amendment there is no such thing as a false idea. However pernicious an opinion

may seem, we depend for its correction not on the conscience of judges and juries
but on the competition of other ideas.”); Gertz v. Robert Welch, 418 U.S. 323, 339—
22

First Amendment jurisprudence and case law which tends to favor
speech and counter-speech rather than ex post liability for
misleading claims.
There is clearly a gap, however, between the paradigmatic
case of a public figure taking revenge on a citizen who expresses an
unfavorable opinion online, and a short seller opening a large
position in the stock, posting an opinion on social media which
induces a frenzied sell-off in the stock, and quickly closing that
position to lock in a profit. That profit was effectively obtained from
public investors who sold based on the opinion, perhaps only to see
the price rise again. The former is clearly consistent with First
Amendment values;67 the latter, less so. Is it possible to draw a
coherent line which separates one from the other?
A natural starting point is the trading activity, which supplies
not only a profit motive to the speech but also raises the question
why these cases are brought as defamation actions to begin with.
Inasmuch as an opinion is made in connection with the purchase or
sale of a security, it is not immune from liability under Rule 10b-5.
The question of liability for opinions was decided by the Supreme
Court in Omnicare v. Laborers District Council Construction Industry
Pension Fund, which held that an opinion can contain an
“embedded” factual assertion that the speaker honestly holds the
40 (1974) (“Under the First Amendment there is no such thing as a false idea.
However pernicious an opinion may seem, we depend for its correction not on the
conscience of judges and juries but on the competition of other ideas.); Silvercorp
Metals Inc. v. Anthion Mgmt. LLC, No. 150374/2011, 2012 WL 3569952, at *4 (N.Y.
Sup. Ct. Aug. 16, 2012) (“[P]ure opinion” [is] subject to full constitutional
protection.”).
67 See Red Lion Broadcasting Co. v. FCC, 395 U.S. 367, 390 (1969) (arguing “the
purpose of the First Amendment [is] to preserve an uninhibited marketplaces of

ideas”); N.Y. Times v. Sullivan, 376 U.S. 254, 270 (1964) (noting the “profound
national commitment to the principle that debate on publish issues should be
uninhibited, robust, and wide-open”); Roth v. U.S., 354 U.S. 476, 484 (1957) (“The
protection given speech and press was fashioned to assure unfettered interchange
of ideas for the bringing about of political and social changes desired by the
people.”).
23

view stated in the opinion.68 While Omnicare involved a Section 11
claim, courts have extended its analysis to Rule 10b-5,69 and there is
no question that Rule 10b-5 applies to short sellers, journalists, and
any other market participant, so long as the misleading opinion is
made with scienter in connection with the purchase or sale of a
security.70
Professor Coffee and I have previously argued that a “V-
shaped” trade—that is, rapidly switching the direction of one’s trade
from short to long, purchasing aggressively to make profits not only
from the decline in the stock price but also from its rebound—likely
suggests that a speaker does not genuinely hold the negative view
expressed in the article, and thus constitutes a misleading opinion
under the Omnicare standard.71 For if one truly thought the
company’s stock price was too high, why turn around and
immediately purchase it?
In Lidingo, the SEC went even further, claiming that a Seeking
Alpha author “misleadingly described his own investment beliefs in
order to induce market responses that he could profit from.”72 The
SEC pointed to statements like the “company’s decision . . . is its best
move at the moment, and could have several long lasting effects that
we are yet to realize,” contrasting these with the author’s trading
behavior: “He purchased 1,100 shares of IMUC the day that this
article was published and sold 1,090 shares the following day for a
profit of approximately $500. While the article disclosed that [the
author] held IMUC shares, the article did not disclose that he
intended to sell those shares.”73
68 Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 135 S. Ct.
1318, 1327 (2015).
70 Rule 10b-5 applies to “any person.” 17 C.F.R. § 240.10b-5(b) (2015).
72 Complaint at 22, Sec. & Exch. Comm’n v. Lidingo Holdings, No. 17-cv-02540
(S.D.N.Y. Apr. 10, 2017).

73 Id. at 23.
24

This approach goes beyond what Professor Coffee and I
previously advocated because it does not require a trade in the
opposite direction of the online post, other than simply closing out
the position. On the SEC’s theory, the deception is inherent in the
implication that, by recommending a stock for purchase or sale, and
disclosing that the author holds an existing position in those shares
which is consistent with that recommendation, the author is
effectively stating that he or she does not intend to close that
position—at least not in the short term.
This idea seems compelling, especially when considered in
light of the duty to correct under Rule 10b-5. As the Second Circuit
held in In re Time Warner Inc. Securities Litigation, “a duty to update
opinions and projections may arise if the original opinions or
projections have become misleading as the result of intervening
events.”74 An activist who posts on social media that they have a
short position in a company whose price is overvalued, and then
rapidly closes that position after a price decline, likely bears a duty
to correct the statement—which remains online for the world to
see—that they have a short position in the stock. That statement is,
quite literally, no longer true, and it seems straightforward to apply
the Time Warner duty to correct to statements like these.75
To be sure, the SEC did not pursue this exact theory in
Lidingo, instead treating the sale the day after the online post as
evidence of undisclosed intent to sell at the time of making the post,
which was a misleading omission.76 This approach seems less
desirable because including a disclaimer along the lines of “we may
close our position at any time in the future” would likely negate any
inference of contrary intent at the time of the post.
74 Time Warner Inc. Sec. Litig., 9 F.3d 259, 267 (2d Cir. 1993).
75 In Time Warner, the court determined that “the attributed public statements lack
the sort of definite positive projections that might require later correction.” Id. at
267. Compare this with the definite projections made by short sellers online. See
Mitts, supra note 20 at 7; Katz & Hancock, supra note 14.
76 Complaint at 23, Sec. & Exch. Comm’n v. Lidingo Holdings, No. 17-cv-02540
(S.D.N.Y. Apr. 10, 2017).
25

On the other hand, the SEC has long held, in a wide variety of
settings, that a generic, boilerplate disclosure is insufficient in the
face of an affirmative duty to correct.77 Thus, a compelling basis for
liability under Rule 10b-5 is the online activist’s silence, after
expressing an opinion and disclosing a position consistent with that
opinion, as to a future change in that position, such that the original
opinion is rendered misleading.
The critical idea here is that the author’s stock position is
inextricably intertwined with his or her view as to the value of the
company. For example, a claim that a company is overvalued is
materially buttressed by the fact that the author has also opened a
short position. Failure to disclose that this additional fact is no
longer true is thus doubly misleading: first, because the statement
that the author has the position is literally no longer true; and
second, because, the underlying opinion as to the value of the firm
has lost that additional dimension of “skin in the game” that gives
market participants an additional reason to believe the author’s
claims are true.78
77 See Payson, Exchange Act Release No. 50589, 2004 WL 2387456 (Oct. 26, 2004)
(“’[B]oilerplate’ or other general disclosures do not suffice when the shareholder
has formulated a specific intention with respect to a disclosable matter.”);
Wilkerson, Exchange Act Release No. 48703, 2003 EL 22433785 (Oct. 27, 2003)
(finding boilerplate disclosure of possible future actions did not adequately
disclose specific plans); Commission Statement and Guidance on Public Company
Cybersecurity Disclosures, 17 C.F.R. §§ 229, 249 (2018) (“Companies should avoid
generic cybersecurity-related disclosure and provide specific information that is
useful to investors.” (footnote omitted)). For a related judicial determination, see
Illinois State Bd. of Inv. v. Authentidate Holding Corp., 369 F. App’x 260, 264 n.3
(2d Cir. 2010) (stating the boilerplate warning “did not put investor on notice of
the particular risk at issue”).
78 The latter reinforces the materiality of the former as well—the author’s position
is material precisely because it is intertwined with a strong opinion as to the value

of the stock, whereas, if he or she were simply holding the position without
expressing the opinion, it is doubtful that the position itself would be material,
unless the author were a well-known activist, such that the mere fact of the
position is material to investors.
26

Before concluding this discussion of information transmission
on social media, it is worth reiterating that while the
constitutionality of the prohibition on securities fraud has been the
subject of some academic writing,79 the Supreme Court has long held
that “the First Amendment does not shield fraud.”80 Indeed, several
circuits have explicitly rejected the notion that antifraud rules
applicable to transactions in securities and commodities raise any
constitutional concerns under the First Amendment.81 And even if
the First Amendment were to apply, the commercial nature of
antifraud and most disclosure rules has led virtually every scholar to
conclude that these will survive constitutional scrutiny under the
commercial speech doctrine.82
Indeed, when considering a constitutional challenge to
Section 17(b) of the 1933 Act, the Tenth Circuit held that “[w]hile
disinterested investment advice will still qualify for full First
79 See, e.g., HENRY N. BUTLER & LARRY E. RIBSTEIN, THE CORPORATION AND THE
CONSTITUTION (1995); Wendy Gerwick Couture, The Collision Between the First
Amendment and Securities Fraud, 65 ALA. L. REV. 903 (2014); Lloyd L. Drury, III,
Disclosure Is Speech: Imposing Meaningful First Amendment Constraints on SEC
Regulatory Authority, 58 S.C. L. REV. 757 (2007); Susan B. Heyman, The Quiet Period
in a Noisy World: Rethinking Securities Regulation and Corporate Free Speech, 74 OHIO
ST. L.J. 189 (2013); Antony Page & Katy Yang, Controlling Corporate Speech: Is
Regulation Fair Disclosure Unconstitutional?, 39 U.C. DAVIS L. REV. 1 (2005); Michael
R. Siebecker, Corporate Speech, Securities Regulation, and an Institutional Approach to
the First Amendment, 48 WM. & MARY L. REV. 613 (2006).
80 Illinois, ex rel. Madigan v. Telemarketing Assocs., Inc., 538 U.S. 600, 612 (2003).
81 See, e.g., SEC v. Pirate Investor LLC, 580 F.3d 233, 255 (4th Cir. 2009)
(“[E]ngaging in securities fraud . . . is unprotected speech”); Commodity Trend

Serv., Inc. v. Commodity Futures Trading Comm'n, 233 F.3d 981, 993 (7th Cir.
2000).
82 See Butler & Ribstein, supra note 79, at 102; Couture, supra note 79, at 956 (“[T]he
vast majority of speech subject to securities regulation is commercial, and thus

most securities regulation likely satisfies the Central Hudson test (consistent with
the dictum in Ohralik).”); Drury, supra note 79, at 771; Heyman, supra note 79, at
195. But see Page & Yang, supra note 79, at 36 (“[T]here is no consensus and no
definite statement from the Supreme Court as to whether traditional First
Amendment protections should apply or a more limited commercial speech
analysis should govern.” (footnotes omitted)).
27

Amendment protection, paid publicists' speech is grounded in
commercial transactions of the kind that the state has traditionally
regulated. A lower level of constitutional protection is therefore
justified than in the case of disinterested advice and commentary.”83
The court acknowledged that the Supreme Court, in a footnote to the
its opinion in Lowe v. SEC, questioned the constitutional implications
of the regulation of investment advisers,84 but distinguished Section
17(b) by pointing out that Section 17(b) “regulates speech which,
though not purporting to offer a security for sale, describes such a
security for consideration received or to be received, directly or indirectly,
from an issuer, underwriter, or dealer.”85
Put differently, the presence of consideration rendered the
speech commercial and thus subject to lower First Amendment
protection. Moreover, after applying the Central Hudson framework
to Section 17(b), the Tenth Circuit concluded that mandatory
83 U.S. v. Wenger, 427 F.3d 840, 848 (10th Cir. 2005).

84 Id. (citing Lowe v. SEC, 472 U.S. 181, 210 n.58). On the issue of investment
advisors, see Gomes, Exchange Act Release No. 81636, 2017 WL 4097900 (Sept. 15,
2017). In that case, the SEC sued an online author under the antifraud rules
governing the Investment Advisers Act of 1940, which impose a lower standard of
culpability than Rule 10b-5. Online posters trading around their filings may be
excluded from the “bone fide publisher” exception to the definition of an
investment adviser under Section 202(a)(11), at issue in Lowe, because they are not
recommending stocks on a “general and regular circulation” as required for that
exception to apply. Lowe, 472 U.S. at 204, 208—210 (1985). This raises a number of
interesting questions, but regardless of whether the 1940 Act applies as a technical
matter, it seems that most online posters lack the sort of fiduciary relationship of a
money manager, which at least has been the traditional application of the 1940 Act.
See id. at 210 (“As long as the communications between petitioners and their
subscribers remain entirely impersonal and do not develop into the kind of
fiduciary, person-to-person relationships that were discussed at length in the
legislative history of the Act and that are characteristic of investment adviser-client
relationships, we believe the publications are, at least presumptively, within the
exclusion and thus not subject to registration under the Act.”). A broad application
of the 1940 Act to bloggers would seem to pose more challenging First
Amendment issues than the antifraud rules.
85 United States v. Wenger, 427 F.3d at 848 (10th Cir. 2005) (emphasis in original)
(internal quotation marks omitted) (quoting 15 U.S.C. § 77(q)(b) (2012)).
28

disclosure of compensation “does not violate [the speaker’s]
commercial speech rights. It allows publicists to still assert a message
while advancing the consumer's interest in knowing the publicists'
financial stake in promoting a stock, thereby reasonably advancing
the government's interest in preventing deception and achieving
more open securities markets.”86 By the same reasoning, a duty to
update a change in the nature of an author’s economic interest in the
stock which they are promoting, is unlikely to raise constitutional
concerns. It is also wholly consistent with the policies advanced by
Section 17(b) and Rule 10b-5 more broadly.
86 Id. at 851.
29

II. PRICE ACCURACY IN AN ALGORITHMIC ERA
In recent years, the capital markets have undergone a series of

technological transformations with far-reaching implications. One of
the most notable has been the rise of algorithmic trading in all its
variants, from trading strategies using machine learning and
predictive analytics to high-frequency trading.87 Much of the debate
over high-frequency trading has focused on the distributional
implications of arbitrage strategies which reallocate profits from
retail investors to algorithmic suppliers of liquidity.88 As Professors
Fox, Glosten and Rauterberg describe at great length in their seminal
book, the core policy tradeoff is whether the welfare gains from
enhanced liquidity justify this compensation, or whether it reflects
wasteful rent-seeking by high-frequency traders.89
While this classical debate is of tremendous importance, in
this Part I examine a different question: how has the algorithmic era
affected the extent to which market prices accurately reflect the
fundamental value of publicly traded companies? An often
87 See Frank Chaparro, Credit Suisse: Here’s How High-Frequency Trading has Changed
the Stock Market, BUS. INSIDER (Mar. 20, 2017),
https://www.businessinsider.com/how-high-frequency-trading-has-changed-the-
stock-market-2017-3; Matt Egan, How Elite Investors Use Artificial Intelligence and
Machine Learning to Gain an Edge, CNN: BUS. (Feb. 17, 2019),
https://www.cnn.com/2019/02/17/investing/artificial-intelligence-investors-
machine-learning/index.html.
88 See, e.g., James J. Angel & Douglas McCabe, Fairness in Financial Markets: The Case
of High Frequency Trading, 112 J. BUS. ETHICS 585 (2013) (examining the fairness of
high-frequency trading strategies); Larry Harris, Opinion, The SEC Wants to Give
Public Investors a Fair Shot, WALL ST. J. (July 18, 2019),
https://www.wsj.com/articles/the-sec-wants-to-give-public-investors-a-fair-shot-
11563490895 (describing the current trading system as “stacked against public
investors,” in part due to the creation of “inverted exchanges” to attract high-
frequency traders); Alexander Osipovich, More Exchanges Add ‘Speed Bumps,’
Defying High-Frequency Traders, WALL ST. J. (July 29, 2019) (“Supporters say speed
bumps can help thwart ultrafast strategies that hurt investors.”).
89 See generally Merritt B. Fox et al., THE NEW STOCK MARKET: LAW, ECONOMICS,
AND POLICY ch. 4 (2019).
30

unstated, implicit assumption in much of the literature is that while
high-frequency algorithms may accelerate the revelation of
fundamental information about publicly traded companies, they
have no effect whatsoever on the equilibrium price which emerges
once the dash to the nanosecond “finish line” has concluded.
In this Part, I discuss reasons to be skeptical of this classical
view. One way that the algorithmic era shapes price accuracy is the
discovery of new sources of data which cause prices to impound
information that might have never emerged otherwise. A chief
example is cybersecurity risk, which has emerged as a central policy
issue for the SEC and other policymakers.90 Another aspect of the
rise of algorithmic technology is the role of limit order cancellations,
which affect how prices update to reflect information.91 The rise in
enforcement actions for spoofing and layering reflects a growing
recognition of the profound effect that this sort of algorithmic order
flow has on market prices.92
a. Cyber Risk: Informed Trading and Disclosure
Cyber risk is one of the most pressing issues facing public

companies. In March 2018, SEC Commissioner Robert J. Jackson, Jr.
90 See, e.g., Commission Statement and Guidance on Public Company

Cybersecurity Disclosures, 17 C.F.R. §§ 229, 249 (2018); DOJ, REPORT OF THE
ATTORNEY GENERAL’S CYBER DIGITAL TASK FORCE (2018),
https://www.justice.gov/ag/page/file/1076696/download; SEC, ANNUAL REPORT:
DIV. OF ENFORCEMENT 7--8 (2018), https://www.sec.gov/files/enforcement-annual-
report-2018.pdf (noting the formation of “Cyber Unit” in 2017 and its “policing of
cyber-related misconduct”); Jay Clayton, Chairman, SEC, Statement on
Cybersecurity (Sept. 20, 2017), https://www.sec.gov/news/public-
statement/statement-clayton-2017-09-20 (“The [SEC] is focused on identifying and
managing cybersecurity risks and ensuring that market participants—including
issuers, intermediaries, investors and government authorities—are actively and
effectively engaged in this effort and are appropriately informing investors and
other market participants of these risks.”).
91 See Fox et al., supra note 89, at 97—99 (providing an example of high-frequency
trading through limit order cancellations).

92 See infra notes 128--130.
31

gave a speech in which he called cybersecurity “an enterprise-level
risk that will require an interdisciplinary approach, significant
investments of time and talent by senior leadership and board-level
attention.”93 Over the past decade, the SEC has issued staff and
Commission-level guidance on the cyber risk disclosure obligations
applicable to public companies,94 much of which has been criticized
as woefully ambiguous and unclear.95
In addition to constituting a central corporate governance
issue, cyber risk also affects secondary trading in the capital markets.
One well-known example is the 2016 hack of pacemakers
manufactured by St. Jude Medical, a then-public medical device
company (and at that time, in the process of being acquired by Abbot
Laboratories) by MedSec, a cybersecurity firm working in tandem
with Muddy Waters Capital, a short-side hedge fund.96 After taking
a substantial short position in St. Jude, Muddy Waters publicly
disclosed the device vulnerability, which led to a decline of about
eight percent in St. Jude’s stock price.97
93 Robert J. Jackson, Jr., Commissioner, SEC, Speech at the Tulane University Law
School 30th Annual Corporate Law Institute: Corporate Governance: On the Front
Lines of America’s Cyber War (Mar. 15, 2018).
94 See Commission Statement and Guidance on Public Company Cybersecurity
Disclosures, 17 C.F.R. §§ 229, 249 (2018); Div. of Corp. Fin., SEC, CF Disclosure
Guidance: Topic No. 2, Cybersecurity (Oct. 13, 2011),
https://www.sec.gov/divisions/corpfin/guidance/cfguidance-topic2.htm.
95 See, e.g., Peter J. Henning, S.E.C.’s New Cybersecurity Guidance Won’t Spur More
Disclosures, N.Y. TIMES: DEALBOOK (Mar. 5, 2018),

https://www.nytimes.com/2018/03/05/business/dealbook/sec-guidance-
cybersecurity.html (noting that while the 2018 guidance “is full of good advice,”
“the S.E.C. has yet to institute any direct measures to compel companies to reveal
the nature and scope of a cybersecurity breach”).
96 Complaint at 12—27, St. Jude Medical, Inc. v. Muddy Waters Consulting LLC,
No. 16-CV-03002 (DWF)(BRT) (D. Minn. Sept. 7, 2016); Matthew Goldstein et al.,
Hedge Fund and Cybersecurity Firm Team Up to Short-Sell Device Maker, N.Y. TIMES:
DEALBOOK (Sept. 8, 2016),
https://www.nytimes.com/2016/09/09/business/dealbook/hedge-fund-and-
cybersecurity-firm-team-up-to-short-sell-device-maker.html.
97 Complaint at 2—3, St. Jude Medical, Inc. v. Muddy Waters Consulting LLC, No.
16-CV-03002 (DWF)(BRT) (D. Minn. Sept. 7, 2016); Tess Stynes, St. Jude Medical
32

In a broad empirical study, Eric Talley and I show that this
pattern of an increase in a short position prior to a cybersecurity
disclosure is commonplace.98 We make use of a novel data set
tracking cybersecurity breach announcements among public
companies to study trading patterns in the derivatives market
preceding the announcement of a breach.99 Using a matched sample
of unaffected control firms, we find significant trading abnormalities
for hacked targets, measured in terms of put-option open interest
and volume.100 All told, our findings appear consistent with the
proposition that arbitrageurs can and do obtain early notice of
impending breach disclosures, and that they are able to profit from
such information.101
Normatively, we argue that the efficiency implications of
cybersecurity trading are distinct—and generally more concerning—
than those posed by garden-variety information trading within
securities markets.102 But the law of securities fraud appears poorly
adapted to this emerging area. For example, in SEC v. Dorozhko, the
Second Circuit held that deceptive conduct in connection with
computer hacking can lead to insider trading liability under Rule
10b-5, but nonetheless concluded that “[i]t is unclear . . . that
exploiting a weakness in an electronic code to gain unauthorized
access is plainly ‘deceptive,’ rather than being mere theft.”103 In May
2019, Representative Jim Himes introduced the Insider Trading
Prohibition Act of 2019, which would effectively overrule Dorozhko
by defining “wrongful use” of material, nonpublic information as
Sues Short Seller Over Device Allegations, WALL ST. J. (Sept. 7, 2016),
https://www.wsj.com/articles/st-jude-medical-sues-short-seller-over-device-
allegations-1473258343 (reporting that St. Jude stock fell 7.6% in the days following
the release of the Muddy Waters report).
98 Joshua Mitts & Eric L. Talley, Informed Trading and Cybersecurity Breaches, 8 HARV.
L. & BUS. REV. (forthcoming 2018).

99 Id. at 6—7.
100 Id. at 13—18, 23.
101 Id. at 2—3.
102 Id. at 27—28.
103
SEC v. Dorozhko, 574 F.3d 42, 51 (2009).
33

including information obtained by “theft, bribery, . . . or espionage”
as well as in “a violation of any Federal law protecting computer
data of the intellectual property or privacy of computer users.”104
Cyber risk trading is a product of the algorithmic era in two
respects. The first is that tradable risks of this kind are generally
discovered by computer programs which search for known
vulnerabilities among public companies.105 Moreover, these
programs may trade on the basis of signals (e.g., on the dark web)
suggesting that a given company is likely to have exposure to a
particular kind of risk. Identifying signals of this type may also
involve the application of machine learning and predictive analytics,
which combine signals from multiple sources in order to forecast the
likelihood of an upcoming negative price change.106 In recent years,
an industry of “alternative data” has emerged to feed algorithms
which trade on the basis of these sorts of predictive signals.107
104 Insider Trading Prohibition Act, H.R. 2534, 116th Cong. § 2 (2019).
105 See Bastian von Beschwitz et al., First to “Read” the News: News Analytics and
Algorithmic Trading 10 (Bd. of Governors of the Fed. Reserve Sys. Int’l Fin.
Discussion Papers, No. 1233, 2018),
https://www.federalreserve.gov/econres/ifdp/files/ifdp1233.pdf (describing
RavenPack, a “service [that] analyzes all the articles on the [Dow Jones] Newswire
with a computer algorithm”).
106 See, e.g., Egan, supra note 87 (describing a high-frequency trading hedge fund
that “depends on machine learning to decipher 300 million data points in the New
York Stock Exchange’s opening hour of trading alone”); Bernard Marr, The
Revolutionary Way of Using Artificial Intelligence in Hedge Funds, FORBES (Feb. 15,
2019), https://www.forbes.com/sites/bernardmarr/2019/02/15/the-revolutionary-
way-of-using-artificial-intelligence-in-hedge-funds-the-case-of-
aidyia/#43eb740457ca (describing how “artificially intelligent machines” analyze
large amounts of data such as corporate reports and news to make trading
decisions); Felix Salmon & Jon Stokes, Algorithms Take Control of Wall Street, WIRED
(Dec. 27, 2010), https://www.wired.com/2010/12/ff-ai-flashtrading/ (describing a
firm’s use of “statistical arbitrage, which involves sifting through enormous pools
of data for patterns that can predict subtle movements across a whole class of
related stocks”).
107 See John Detrixhe, Selling Data to Feed Hedge Fund Computers is One of the Hottest
Areas of Finance Right Now, QUARTZ (Sept. 20, 2017), https://qz.com/1082389/quant-

hedge-funds-are-gorging-on-alternative-data-in-pursuit-of-an-investing-edge/.
34

The welfare implications of this form of algorithmic trading
are difficult to pin down. On the one hand, cyber risk trading can be
seen as a form of informed announcement trading which likely leads
to wider bid/ask spreads and thus increases the cost of capital
obtained by issuers seeking to raise funds in the capital markets.108
The key assumption in that analysis is that the issuer was intending
to announce the vulnerability in any event, so the profits obtained by
the investment in cyber risk discovery algorithms are transitory and
make no contribution to fundamental price accuracy.109
On the other hand, it is far from clear that knowledge of the
vulnerability would have emerged without such cyber risk trading.
Consider again the discovery that St. Jude Medical’s pacemakers
were hackable.110 It is very likely that MedSec would not have
invested the time in uncovering this vulnerability if Muddy Waters
were not able to share these profits from its short position.111 Would
society be better off by that disclosure not having occurred?
It appears that the answer to this question turns on a
counterfactual inquiry into whether the information would ever
emerge at all, or whether it might actually emerge in a more harmful
way. Suppose, for example, that a hostile state-sponsored group
were first to discover that St. Jude’s pacemakers were hackable. In
that case, this information could be deployed in a malicious
cyberattack against innocent victims. Viewed against that possible
108 Merritt B. Fox et al., Informed Trading and its Regulation, 43 J. CORP. L. 817, 846—
47, 850 (2018) (discussing how both trading on announcement information before
it is fully reflected in share price and trading on inside information widen bid/ask
spreads and raise the cost of capital).
109 See id. at 852--53 (noting that the “when informed trading improves price
accuracy for only a brief period of time, the improvement will not have any
important effects on enhancing the efficiency of the real economy”).
110 See supra notes 96--97 and accompanying text.
111 See Jim Finkle & Dan Burns, St. Jude Stick Shorted on Heart Device Hacking Fears;
Shares Drop, REUTERS (Aug. 25, 2016), https://www.reuters.com/article/us-stjude-

cyber-idUSKCN1101YV (quoting MedSec Chief Executive’s explanation of the
partnership with Muddy Waters: “We have expenses we incur. This is a business
relationship.”).
35

counterfactual, one might argue that MedSec and Muddy Waters
provided the public with valuable information—and the trading
profits which are obtained from the short position are much-
deserved compensation for that information.
Indeed, a similar rationale underlies the emergence of so-
called “bug bounties,” reward programs operated by technology
companies to create an economic incentive to identify cybersecurity
vulnerabilities.112 For example, at the time of this writing, Google
offers $31,337 for the discovery of a serious security vulnerability
which provides for remote code execution like command injection,
deserialization bugs, and sandbox escapes.113 Other award amounts
include $100, $500, $5,000, $7,500, and so forth.114
The trading profits obtained by shorting a company and
disclosing a cybersecurity vulnerability can be analogized to a kind
of bug bounty. But these profits differ from actual bug bounties in
several respects. For one, the profits are effectively paid by the other
traders in the secondary market, rather than the victim firm itself.
Thus, all else equal, a traditional bug bounty would seem to induce a
certain level of deterrence on the part of the victim firm—i.e., failing
112 See Martin Giles, Crowdsourcing the Hunt for Software Bugs is a Booming Business---
and a Risky One, MIT TECH. REV. (Aug. 23, 2018),
https://www.technologyreview.com/s/611892/crowdsourcing-the-hunt-for-
software-bugs-is-a-booming-businessand-a-risky-one/ (“More and more large
companies like GM, Microsoft, and Starbucks, are now running ‘bug bounty’
programs that offer monetary rewards to those who spot and report bugs in their
software.”); Erin Winick, Life as a Bug Bounty Hunger: A Struggle Every Day, Just to
Get Paid, MIT TECH. REV. (Aug. 23, 2018),
https://www.technologyreview.com/s/611896/life-as-a-bug-bounty-hunter/.
113 Google Vulnerability Reward Program (VRP) Rules, GOOGLE APPLICATION
SECURITY, https://www.google.com/about/appsecurity/reward-program/ (last

visited Aug. 22, 2019).
114 Id. Google is not the only company that offers bug bounties. See, e.g., AT&T Bug
Bounty Program, https://bugbounty.att.com (last visited Aug. 22, 2019); The

Internet Bug Bounty, HACKERONE, https://www.hackerone.com/internet-bug-
bounty (last visited Aug. 22, 2019); United Airline Bug Bounty Program,
https://www.united.com/ual/en/us/fly/contact/bugbounty.html (last visited Aug.
22, 2019) (paying the bounty in airline miles).
36

to identify a cyber risk imposes a direct cost, which can be avoided if
the firm makes the right level of ex ante investment. In addition,
traditional bug bounties are not a form of informed trading and thus
do not affect bid/ask spreads or the cost of capital.
That said, the profits obtained by a short seller who is able to
move the market price of a publicly traded company are likely to
substantially exceed the amount of a traditional bug bounty. For
example, the decline in the market capitalization of St. Jude’s stock
upon the announcement of the cybersecurity vulnerability exceeded
$1 billion115—and even a small stake in such a decline would yield a
profit far in excess of amounts like those offered by Google in its bug
bounty program.
The comparison to bug bounties is also useful when
considering the alternative counterfactual that the information might
have never been publicly disclosed in the first place. Here the key
distinction is between discovery of the cybersecurity vulnerability and
public disclosure of that information. A bug bounty allows for the
former without the latter—and indeed, firms often request that
security researchers first disclose the flaw to the company so that it
may be repaired prior to announcing the vulnerability to the world.
Google, for example, asks for “a reasonable advance notice” of a
security vulnerability before it is publicly disclosed.116
115 See Finkle & Burns, supra note 111 (“St Jude shares closed down 4.96 percent, the
biggest one-day fall in 7 months and at a 7.4 percent discount to Abbott’s takeover
offer [of $25 billion].”).
116 Google Vulnerability Reward Program (VRP) Rules, supra note 113 (“In essence,
our pledge to you is to respond promptly and fix bugs in a sensible timeframe -
and in exchange, we ask for a reasonable advance notice.”); see also Chris Evans et
al., Google Security Team, Rebooting Responsible Disclosure: A Focus on
Protecting End Users, GOOGLE SECURITY BLOG (July 20, 2010),
https://security.googleblog.com/2010/07/rebooting-responsible-disclosure-
focus.html. Other companies have similar policies, and can go even further. See,
e.g., AT&T Bug Bounty Program, supra note 114 (prohibiting public disclosure);
Report a Security Issue, 23ANDME, https://www.23andme.com/security-report/
(last visited Aug. 22, 2019) (“We ask that you follow principles of responsible
disclosure and give the 23andMe security team a reasonable amount of time to
respond to and correct the submitted issue before you make it public.”).
37

On the other hand, trading profits are only obtained via
public disclosure of the vulnerability, which induces a stock-price
decline. Moreover, those profits are typically maximized by publicly
disclosing the flaw prior to the company remedying the problem via
a security patch or device recall. The reason is simple: any stock-
price decline is likely to be smaller once the problem has been fixed,
because there is an important bit of new, positive information—
namely, that the company has corrected the vulnerability.
Of course, privately sharing a cybersecurity vulnerability with
a target firm is likely to dramatically shorten the period during
which the vulnerability is known to the public but not yet resolved—
indeed, that period may disappear completely when companies
respond promptly and proactively to notice of the risk. This can be
beneficial—e.g., a shorter window of time during which medical
devices can be hacked. But none of that matters if the bug bounty is
too small to justify the investment of time and resources which are
necessary to discover the vulnerability.
To summarize, when the cost of uncovering a vulnerability is
below the compensation threshold of a bug bounty program, it
appears that private revelation and compensation via that
mechanism is desirable. But since the cost of uncovering many
vulnerabilities is likely to exceed these programs, trading on
cybersecurity disclosures may be the only way to compensate
security researchers for the time-consuming effort involved. If so,
and if one is convinced that these disclosures are socially beneficial,
that should give reason to worry that Insider Trading Prohibition
Act of 2019 sweeps too far.117
117 Insider Trading Prohibition Act, H.R. 2534, 116th Cong. §2 (2019) (defining
wrongfully obtained material to include breach of federal data privacy and
intellectual property laws and “unauthorized . . . taking”); see also Peter J. Henning,
Will Congress Expand the Insider Trading Prohibition?, N.Y. TIMES: DEALBOOK (Mar.
24, 2019), https://www.nytimes.com/2019/05/24/business/dealbook/insider-trading-
act.html (“Under the new legislation, [hackers’] efforts to obtain confidential
information by breaching computer security measures would be subject to the
insider trading prohibition.”); Rahul Mukhi et al., A Look Inside H.R. 2534: Insider
Trading Prohibition Act, HARV. L. SCH. F. ON CORP. GOVERNANCE & FIN. REG. (July
38

Finally, it is worth considering the link between informed
trading and disclosure of cybersecurity risks. In his March 2018
speech, SEC Commissioner Jackson cited a study he conducted with
SEC staff, which found that “of 82 cybersecurity incidents at public
companies in 2017, only four companies chose to file an 8-K
disclosing the breach to their investors.”118 “In other words, in 2017,
companies that suffered data breaches chose not to file an 8-K more
than 97% of the time.”119 Of course, it is well-understood that there
is no general duty to disclose material corporate events on Form 8-
K,120 and there is no specific Form 8-K item number corresponding to
cybersecurity events.121 Moreover, the materiality of any given
cybersecurity incident is often an open question.122
But the figures cited by Commissioner Jackson nonetheless
suggest that firms are often erring on the side of silence when faced
with a technological security breach. This raises troubling
25, 2019), https://corpgov.law.harvard.edu/2019/07/25/a-look-inside-h-r-2534-

insider-trading-prohibition-act/ (“[T]he new standard would capture insider
trading by cyber intruders that has to date been difficult to punish as insider
trading.”).
118 Jackson, supra note 93.
119 Id.
120 See, e.g., Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 44 (2011) (“Moreover,
it bears emphasis that § 10(b) and Rule 10b–5(b) do not create an affirmative duty
to disclose any and all material information.”); Basic Inc. v. Levinson, 485 U.S. 224,
239 n.17 (1988) (“Silence, absent a duty to disclose, is not misleading under Rule
10b–5.”).
121 Form 8-K, SEC, https://www.sec.gov/about/forms/form8-k.pdf; see also Jackson,
supra note 93 (“I’ve called upon my colleagues at the SEC to give careful
consideration to new 8-K requirements governing cyber events.”). The recent SEC
cybersecurity guidance “encourages,” but does not require, “disclosure pertaining
to cybersecurity matters” on Form 8-K. See Commission Statement and Guidance
on Public Company Cybersecurity Disclosures, supra note 94, at 10.
122 See Commission Statement and Guidance on Public Company Cybersecurity
Disclosures, supra note 94, at 11 (“The materiality of cybersecurity risks or

incidents depends upon their nature, extent, and potential magnitude, particularly
as they relate to any compromised information or the business and scope of
company operations . . . [and] also depends on the range of harm that such
incidents could cause.” (footnotes omitted)).
39

governance questions, in that failure to disclose these events may
blind investors to poor oversight or the accumulation of low-level
missteps that eventually lead to a major problem for the company.
Somewhat ironically, a broad cyber risk disclosure rule might benefit
those traders and security researchers who open a short position in
anticipation of a negative market reaction, by broadening the set of
vulnerabilities whose discovery must be disclosed and thereby
yielding some chance of a price decline.
b. Algorithmic Limit Order Cancellations
A second way in which the algorithmic revolution shapes

price accuracy is limit order cancellations. When market makers
provide liquidity to markets, they place and cancel limit orders as
the price moves.123 To take a simple example, suppose that the
current national best-bid-best-offer (“NBBO”) for a security is $9.95 /
$10.05. This means that a market maker is willing to purchase the
security from a potential seller at the price of $9.95, and sell that
security to a potential buyer at the price of $10.05. The difference of
$0.10 between these two prices is known as the “spread,” and
reflects compensation to the market maker for the risk of providing
liquidity to a market.124
The chief of these risks is that a market maker will sell to a
buyer when the price is about to rise or buy from a seller when the
price is about to fall.125 In both cases, the market maker loses and
thus will post a bid-ask spread which, on average, compensates the
market maker for these costs by yielding a sufficiently high revenue
in the other cases where the price does not move in one direction or
the other.126 Suppose, for example, that 90% of the time the price
remains stable, i.e., the market maker buys at $9.95 and sells at
123 See Fox et al., supra note 89, at 13. See generally id. at 21—24 (describing basic of a
limit order market).
124 See id. at 34, 65.
125 See id. at 65—66.
126 See id. at 66—69.
40

$10.05, to yield a revenue of $0.10 per trade. Ten percent of the time,
the market maker either buys when the price rises by $0.90 or sells
when the price is about to fall by $0.90. In those cases, the market
maker loses $0.90, but again, this occurs 10% of the time. It is
straightforward to see that the market maker breaks even: 90% x
$0.10 – 1% x $0.90 = $0.
For this reason, market makers will often cancel orders which
they have placed, in order to adjust for the risk of providing liquidity
at the wrong time, i.e., selling to a buyer before a price increase or
buying from a seller before a price decline.127 If, for example, a series
of sell orders arrives in rapid succession, a market maker might react
by lowering the highest price at which they are willing to purchase
the stock, i.e., to ensure that they are not buying before a price
decline. That necessarily implies cancelling existing limit orders to
buy the stock, and placing new buy orders at lower prices.
But the very same pattern—cancelling large amounts of
existing limit orders and placing new orders—can serve to signal
that there is outstanding supply (or demand) which has not found a
buyer (or seller).128 And that, in turn, can cause other market
participants to cancel their own orders for the stock, and thereby
drive the execution prices of trades in that security up or down.
To see how this works, suppose that the current best bid for a
security is $9.99 and the best offer is $10.01, and that these orders
were posted by a market maker which I will denote “V”. V then
observes a vast number of sell orders arriving at $10.00, which are
cancelled within milliseconds of being placed. Observing this order
flow, V might rationally conclude that sellers are having a difficult
time finding a buyer at $10.00. That might very well imply that the
value of the security should be lower, i.e., there is a lack of buyers at
127 See Bradley Hope, As ‘Spoof’ Trading Persists, Regulators Clamp Down, WALL ST. J.
(Feb. 22, 2015), https://www.wsj.com/articles/how-spoofing-traders-dupe-markets-
1424662202 (“Market-making firms continuously adjust and cancel orders as they
monitor supply and demand for a particular security.”).
128 See Indictment at 3, 10—11, United States v. Sarao, No. 15-CR-75 (N.D. Ill. Sept.
2, 2015).
41

$10 and thus the price will decline in the future. This inference leads
V to revise down its $9.99 bid to $9.98—after all, V does not want to
purchase a stock at $9.99, which will later be worth $9.98 or less. At
some point, a seller comes along and transacts at $9.98 by hitting V’s
buy order, so the price has fallen by $0.01.
Nonetheless, this pattern is also consistent with a different
story. Return to the assumption that the best bid and best offer of
the security is $9.99 / $10.01. Now suppose that a market participant,
which I will denote “S,” is intent on driving down the price of the
security, without simply selling shares—i.e., to create a buying
opportunity at an artificially low price, or to close out a preexisting
short position in the stock.
Suppose that S intentionally places and cancels vast quantities
of sell orders at $10.00. V cannot observe S’s intent, so V again
draws a rational inference that sellers might be having a difficult
time finding a buyer at $10.00. And as before, V revises its bid at
$9.99 down to $9.98, and a trade is ultimately executed at $9.98. S
has succeeded in driving down the price of the stock by creating and
cancelling orders—behavior which appears to signal an inability to
find buyers for the security.
Alternatively, suppose that S is worried that the limit sell
order at $10.00 might inadvertently execute, e.g., if the price is rising,
putting S in a losing position. S might reduce that risk by placing his
limit sell order higher in the order book, e.g., at a price of $10.03,
which is less likely to execute. Even if the price rises to $10.02, S’s
order at $10.03 will not execute. But by creating and cancelling large
blocks of orders at $10.03, S still sends a signal to V—namely, that
there exists a seller out there who is trying to sell at $10.03—and all
else equal, V rationally infers that the price is unlikely to rise much
further. The sell order at $10.03 signals a partial “ceiling” on the
price, which naturally leads V to be a bit more pessimistic—and
thereby makes a price decline more likely.
The intentional creation and cancellation of large quantities of
limit orders to induce an artificial change in a stock price is known as
spoofing (for orders at or within the bid/ask spread) and layering (for
42

orders outside the bid/ask spread), forms of market manipulation
which have served as the basis for prosecutions and enforcement
actions by the DOJ and SEC.129
Of course, as in the law more generally, intent is rarely
observed directly and must be inferred from the available
circumstantial evidence. There is no doubt that massive waves of
limit order cancellations, especially below the best bid or above the
best offer, are suggestive of algorithmic manipulation.130 That
inference is especially compelling when market participants have an
a priori reason to buy (or sell) the stock, and the cancellations are
concentrated in buy (or sell) orders, respectfully.
To see why, consider the case where a short seller attacks a
public company, and one observes a massive wave of sell order
cancellations.131 Suppose that the public believed the short seller and
attempted to sell the stock. Then one would expect to see sell orders
execute—or hit outstanding buy orders—at prices below the best bid.
Consider, for example, that the firm’s stock currently trades at $10.00
per share, and the seller believes the fundamental value of the firm is
$9.00 per share—i.e., the shares are overpriced by 10%. With no
transaction costs, such a seller would profit by selling the shares at
any price above $9.00. So long as the shares will reach the true,
129 See, e.g., Complaint, SEC v. LEK Securities Corp., No. 17-CV-1789 (DLC)
(S.D.N.Y. Mar. 10, 2017); Briargate Trading, LLC, Exchange Act Release No. 9959,
2015 WL 5868196 (Oct. 8, 2015); Indictment, United States v. Sarao, supra note 128;
Complaint, United States v. Milrud, No. 15-CV-237 (KM) (SCM) (D.N.J. Jan. 13,
2015).
130 See, e.g., United States v. Coscia, 866 F.3d 782, 795—98 (7th Cir. 2017), reh’g and
suggestion for reh’g en banc denied (Sept. 5, 2017), cert. denied, 138 S. Ct. 1989 (2018)
(finding intent based on circumstantial evidence); Briargate Trading, LLC,
Exchange Act Release No. 9959, 2015 WL 5868196 at *4--5 (Oct. 8, 2015)
(establishing intent based on canceling order).
131 I have identified patterns like these in order flow data. See, e.g., Lisa Pham,
Burford Capital Alleges of Potential Market Manipulation, BLOOMBERG (Aug. 12, 2019),
https://www.bloomberg.com/news/articles/2019-08-12/burford-says-evidence-
points-to-market-manipulation-of-shares?srnd=markets-vp.
43

fundamental value of $9.00 per share, the seller profits by selling
above that price.
To be sure, the presence of transaction costs might increase
such a seller’s break-even point to some price slightly above $9.00.
Nonetheless, it is hard to identify an economic justification for such a
seller to place a large volume of sell orders at prices higher than
$10.00, the best offer at that time. Indeed, such a sell order seems to
betray a lack of genuine belief that the stock is overvalued: for if the
seller truly believed the stock price were too high, he or she would
not expect a future increase in the price. These high-priced sell
orders, which are ultimately cancelled, effectively deprive the seller
of the opportunity to sell at a price between $10.00 and $9.00, the
supposed fundamental value of the firm’s shares. In this respect,
they appear to serve only one purpose: to convey the misleading
impression that market participants are failing at their attempts to
sell the stock, and thereby induce a price decline.
Of course, there remains the faint possibility that a seller is
simply trying to open a position at the highest possible price, fails,
and cancels orders as a result. But against the backdrop of a short
attack, that seems unlikely—after all, a thesis has been advanced that
should cause the stock price to fall. It is for this reason that massive
waves of cancellations in the same direction as an investment thesis
are suggestive of algorithmic manipulation, for they contradict the
underlying logic of the thesis.
This discussion of algorithmic order cancellations shows how
limit orders impose a kind of externality, giving market participants
information about supply and demand. Liquidity providers and
liquidity takers rationally learn from each other by observing the
order book. It follows, therefore, that algorithmic order cancellations
can lead to information cascades, i.e., sequences of price changes
which are driven solely by other price changes.132 This can manifest
132See CFTC & SEC, FINDINGS REGARDING THE MARKET EVENTS OF MAY 6, 2010 2—6
(2010), https://www.sec.gov/news/studies/2010/marketevents-report.pdf
(describing the algorithmic trading cascade believed to have destabilized the
44

as extreme rapid market volatility—"flash crashes,” when prices fall,
and “flash pumps”, when prices rise. This volatility, in turn, can
provide algorithmic traders with substantial (albeit risky) arbitrage
opportunities. If a trader can be reasonably certain when peaks and
troughs will emerge in the price, that means profits can be made
with relative precision. This, in turn, creates a powerful incentive to
continue to flood the market with limit order cancellations.
As technology has evolved in this area, prosecutors and
enforcement authorities have sought to apply anti-fraud law to
prosecute the deliberate creation of volatility in the capital markets
through techniques like spoofing and layering.133 While a complete
survey of the legal authorities to prosecute market manipulation is
beyond this chapter, it is worth pointing out that 18 U.S.C. § 1348 has
been an underappreciated source of authority for criminal
prosecutors to pursue anti-manipulation cases.134
Section 1348(1) provides that it is a felony when someone
“knowingly executes, or attempts to execute, a scheme or artifice-- to
defraud any person in connection with . . . any security of an issuer
with a class of securities registered under section 12 of the Securities
Exchange Act of 1934 (15 U.S.C. 78l) or that is required to file reports
under section 15(d) of the Securities Exchange Act of 1934 (15 U.S.C.
78o(d)).”135 As Sandra Moser and Justin Weitz have explained, the
market). The CFTC later charged an individual in part with precipitating the 2010
flash crash. See Indictment at 16—18, United States v. Sarao, supra note 128.
133 See, e.g., Briargate Trading, LLC, Exchange Act Release No. 9959, 2015 WL
5868196, at *5 (Oct. 8, 2015)

Complaint at 46—55, SEC v. LEK Securities Corp., supra note 129; Indictment at
23—24, United States v. Sarao, supra note 128; Complaint at 9—14, United States v.
Milrud, supra note 129.
134 See Sandra Moser & Justin Weitz, 18 U.S.C. § 1348—A Workhorse Statute for
Prosecutors, DOJ J. FED. L. & PRAC., Oct. 2018, at 111. Section 1348 has been utilized
in a number of recent prosecutions. See, e.g., Superseding Indictment, United States
v. Flotron, No. 17-CR-220 (JAM), 2018 WL 1964548 (D. Conn. Jan. 30, 2018);
Indictment, United States v. Coscia, No. 14-CR-551, 2014 WL 10584583 (N.D. Ill.
Oct. 1, 2014).
135 18 U.S.C. § 1348(1) (2012).
45

Seventh Circuit’s decision in United States v. Coscia “blessed the use
of section 1348(1) in market manipulation and spoofing cases where
the charged conduct was alleged to be undertaken with the intent to
defraud.”136 Moser and Weitz point out that “this approach was
echoed recently in the District of Connecticut in United States v.
Flotron. In Flotron, the defendant was charged with conspiracy to
commit commodities fraud pursuant to 18 U.S.C. § 1349, as a result
of his ‘spoofing’ in the precious metals futures markets.”137
One chief advantage of Section 1348 for prosecutors and
enforcement authorities is that, unlike Section 10(b) of the Securities
Exchange Act of 1934, Section 1348 is not restricted to fraud “in
connection with the purchase or sale of a security.”138 In this respect,
one cannot object that the lack of a purchase or sale when cancelling
an order affects the applicability of the criminal prohibition, so long
as the security is registered or reported under the 1934 Act.
136 Moser & Weitz, supra note 134, at 117.

137 Id.
138 Compare 18 U.S.C. § 1348(1) (2012) with 15 U.S.C. § 78j(b) (2012).
46

III. CONCLUDING COMMENTS
As I noted in the Introduction, it is impossible to

comprehensively discuss the many ways technology has affected the
capital markets. In this survey, I have sought to focus on the key
ways in which technological innovation is challenging the
assumptions underlying the regulatory framework applicable to the
purchase and sale of securities. I conclude by briefly surveying an
emerging frontier at the intersection of law, finance and technology:
the rise of digital ledger technology.
The field of digital ledger technology (DLT) is an area of
rapidly evolving innovation.139 To be sure, these assets still reflect a
very small fraction of the capital markets, and it appears unlikely
that they will displace trading in traditional securities anytime
soon.140 And the breathtaking pace of change ensures that a
discussion of specific technologies will rapidly become obsolete. It is
precisely for this reason that proponents of DLT often argue for a
hands-off approach to regulation, allowing the market to evolve
naturally, claiming that it is a fools’ errand to devise rules to govern
139 For instance, Marc Andreessnn of the technology venture capital firm,
Andreessen Horowitz, described blockchain as “the early days of the internet, web
2.0, or smartphones.” Andrew Ross Sorkin, Demystifying the Blockchain, N.Y. TIMES:
DEALBOOK (June 27, 2018),
https://www.nytimes.com/2018/06/27/business/dealbook/blockchain-
technology.html.
140 The total market capitalization of cryptocurrencies is about $255 billion.
COINMARKETCAP, https://coinmarketcap.com (last updated Sept. 2, 2019). By way

of comparison, Apple, Microsoft and Amazon each reached $1 trillion dollars in
market capitalization in 2018. Kabir Chipper, The Battle for the Biggest Market Cap,
Charted, QUARTZ (Dec. 21, 2018), https://qz.com/1503505/apple-microsoft-amazon-
the-battle-for-biggest-market-cap-charted/. Additionally, the value of
cryptocurrencies is very volatile. See Nathaniel Popper & Su-Hyun Lee, After the
Bitcoin Boom: Hard Lessons for Cryptocurrency Investors, N.Y. TIMES (Aug. 20, 2018),
https://www.nytimes.com/2018/08/20/technology/cryptocurrency-investor-
losses.html (noting that between January and August 2018, “[t]he value of all
outstanding digital tokens [fell] by about $600 billion, or 75 percent”).
47

technology which is itself rapidly evolving.141 Technologists
frequently point to the Internet as an example of technology which
flourished in the absence of heavy-handed regulation.142
Of course, the dot-com bubble eventually burst, and there is
every reason to believe that initial coin offerings (ICOs) and other
digital tokens are not only ripe with exuberance but also rife with
fraud. In a comprehensive study of ICOs, David Hoffman and co-
authors have shown that most ICOs fail to implement in computer
code the promises outlined in their white paper disclosures.143 And
the SEC has brought a number of enforcement actions against firms
selling unregistered securities in the form of digital tokens.144 These
are likely the typical growing pains expected of a field which is
subject to rapid innovation. What lessons can we draw from the
141 See, e.g., Examining Regulatory Frameworks for Digital Currencies and Blockchain,
116th Cong. (2019) (statement of Jeremy Allaire, Co-Founder, CEO, and Chairman,
Circle Internet Financial Limited) (“To support this innovation and
experimentation, it is crucial that governments approach this new asset class with
a relatively light touch.”); Dave Michaels & Alexander Osipovich, Venture Capital
Stalwart Battles Washington’s Crypto Crackdown, WALL ST. J. (Sept. 1, 2019),
https://www.wsj.com/articles/venture-capital-stalwart-battles-washingtons-crypto-
crackdown (reporting that Marc Andreessen of Andreessen Horowitz said
“[c]rypto . . . could solve some of the internet’s biggest challenges, including
privacy threats, if Washington would adopt a less stringent form of regulation”).
142 See, e.g., Philip J. Weiser, The Future of Internet Regulation, 43 U.C. DAVIS L. REV.
529, 534 (2009) (noting that the internet “developed in an environment largely free
of regulation”); Margaret O’Mara, Opinion, Letting the Internet Regulate Itself was
a Good Idea—in the 19990s, N.Y. TIMES (July 5, 2019),
https://www.nytimes.com/2019/07/05/opinion/tech-regulation-facebook.html
(“Washington’s hands-off approach ultimately permitted a marvelous explosion of
content and connectivity on social media and other platforms.”).
143 Shanaan Cohney et al., Coin-Operated Capitalism, 119 COLUM. L. REV. 591 (2019).
144 See, e.g., Gladius Network LLC, Exchange Release No. 10608, 2019 WL 697993
(Feb. 20, 2019) (finding violations § 5(a) and § 5(c) of the Securities Act for offering
and selling securities in the form of digital tokens without having a registration
statement in effect or an exemption from registration); Carriereq, Inc., Exchange
Release No. 10575, 2018 WL 6017664 (Nov. 16, 2018) (same); Paragon Coin, Inc.,
Exchange Release No. 10574, 2018 WL 6017663 (Nov. 16, 2018) (same); Munchee
Inc., Exchange Release No. 10445, 2017 WL 10605969 (Dec. 11, 2017) (same).
48

emergence of digital assets, beyond the obvious admonition that
fraud should be vigorously prosecuted?
It is difficult to generalize, because so much of this technology
is in its infancy. But one point that emerges thus far is that a deep
understanding of the technology underlying a digital asset is
essential to evaluate the risks associated with purchasing it. The
investment decision is as much a technology problem as it is a
finance problem. Consider, for example, the finding in the Hoffman
study that most ICOs fail to implement in computer code the
governance and related features described in their white papers.145
Suppose, for purposes of argument, that a digital asset constitutes a
security. Does that constitute a violation of Rule 10b-5, i.e., a
misstatement or omission made with scienter in connection with the
purchase or sale of a security?
A key question is whether a description of the technology
underlying a digital asset, as found in a white paper promoting the
technology is in effect superseded by the free availability of the
computer code, which seems to imply the opposite. Is this finding
akin to a CEO stating optimistic goals for the company, while
simultaneously releasing a financial statement which gives investors
an accurate picture of the company’s finances? Or is it akin to fraud,
in that the disclosure says one thing while the computer code—the
“truth”, in a sense—says another?
The SEC seems amenable to the latter theory. For instance, in
its complaint alleging “illegal unregistered securities offering and
ongoing fraudulent conduct and misstatement,” the SEC noted that
the company’s whitepaper makes certain statements about charitable
giving, “there is not program code” for such giving.146
More generally, this finding raises deeper questions around
what is material to investors in an era of increasing technological
complexity and sophistication. The traditional definition of
materiality—what alters the total mix of information which matters
See Cohney et al., supra note 143 at 597—99.

145
Complaint, Sec. & Exch. Comm’n v. REcoin Group Foundation, LLC, No. 17-
146
CV-5725 (RJD) (RER) (E.D.N.Y. Sept. 29, 2017).
49

to a reasonable investor when choosing to buy or sell stock147—is
normative in nature, but nonetheless has a kind of empirical test at
its core. Clearly, if information actually drives investment
decisions—i.e., we can observe investors utilizing it when choosing
how to invest their capital—there is a strong case for its materiality.
The question, then, is when technological sophistication
becomes so crucial that it actually is necessary to make informed and
accurate investment decisions. An understanding of the computer
code underlying a digital token would seem to fall into that category.
But what about the very sort of technological change driving new
forms of information transmission and secondary market trading?
Should the SEC require, in addition to an asset or net worth test, an
examination of the computational, programming or similar types of
technological sophistication that an investor possesses?
These are difficult questions, and our perspective in ten years
from now may look very different from today. So long as the capital
markets continue to evolve at the rate of change that we have
observed over the past decade, the gulf will only widen between
lawyers and regulators who understand the new capital market, and
those who are left behind. There seems to be a prima facie case for
incorporating technological sophistication into securities regulation.
Perhaps policymakers should rethink what “investor protection”
means in a world which is undergoing rapid technological change.
In this respect, of course, the capital markets are hardly unique.148
147 Basic Inc. v. Levinson 485 U.S. 224, 321—32 (1988) (quoting TSC Industries, Inc.
v. Northway, Inc., 426 U.S. 438, 448—49 (1976)).
148 In the words of Andrew Yang, “All you need is self-driving cars to destabilize
society.” Kevin Roose, His 2020 Campaign Message: The Robots Are Coming, N.Y
TIMES, Feb. 10, 2018.
50

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A Legal Perspective on Technology and the Capital Markets:

Social Media, Short Activism and the Algorithmic Revolution

In this essay, I examine the technological revolution in the capital

It is with excitement and yet some trepidation that I examine

* Associate Professor of Law, Columbia University. This chapter has been

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1 See infra notes 11--14 and accompanying text.

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3 See infra notes 40--43 and accompanying text.

6 See infra Section II.b.

7 See infra notes 131--133 and accompanying text.

8 See infra notes 134--138 and accompanying text.

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9 See infra Part III.

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A rapidly growing research area in finance examines how

Newspapers to Fold, CHI. TRIB. (Mar. 11, 2019),

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a. Negative Activism on New Media

The rise of social media platforms like Twitter, Seeking Alpha,

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on Social Media 1 (Apr. 14, 2018) (unpublished manuscript),

17 Jiahua Xu & Benjamin Livshits, The Anatomy of a Crypotcurrency Pump-and-

Dump Scheme 1 (Nov. 25, 2018) (unpublished manuscript),

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Costing Others Millions, WALL ST. J. (Aug. 5, 2018),

25 Barbara A. Bliss et al., Negative Activism, 97 Wash. U. L. Rev. (forthcoming)

(manuscript at 5) (on file with author).

Electronic copy available at: https://ssrn.com/abstract=3447235

nature, scholars typically view new accurate information about securities as a

Company Boards, MCKINSEY & CO. (Jan. 2017),

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Pseudonymity, SEEKING ALPHA (Mar. 19, 2014),

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interventions produce short-term improvements in performance at the expense of

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In their work on informed trading and its regulation, Merritt

38 Id. at 850, 853.

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39 See supra note 20.

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45See Mitts, supra note 20, at 15—17.

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c. Regulating the Online Expression of Market-Moving Opinion

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N.Y. TIMES (July 28, 2003), https://www.nytimes.com/2003/07/28/business/media-

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or receive other economic benefits from a company you regularly report on or

theory, a fiduciary's undisclosed, self-serving use of a principal's information to

Stocks Must be Disclosed to Investors (Apr. 10, 2017),

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endorsements “is a violation of the anti-touting provisions of the federal securities

(S.D.N.Y. Apr. 10, 2017).

59 “[T]here is no analogue statute to Section 17(b) requiring an author of a negative

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(Perspective), BLOOMBERG LAW: BIG LAW BUSINESS (Apr. 21, 2017),

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62 Nanoviricides, Inc. v Seeking Alpha, Inc., No. 151908/2014, 2014 WL 2930753, at

(PGG)(KHP), 2018 WL 847014, at *7 (S.D.N.Y. Jan. 12, 2018), report and

Amendment there is no such thing as a false idea. However pernicious an opinion

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