A black edge is material nonpublic information that is used by hedge funds as the basis for trades and investments. Investors and traders are constantly trying to get an edge over other market participants. This can be done through research, analysis, or studying the market and companies. This is what most retail investors are able to do in order to further expand their knowledge before they make an investment or a trade.
This information allows investors and traders to have an advantage over other market participants. However, there is some information that should not be shared with the public. Because they put the integrity of the market at risk. This is why entities like the Securities and Exchange Commission (SEC) make sure that all market participants invest and trade based on the same set of disposable information. Otherwise, that would make the whole financial system a rigged game.
Origin of the expression “black edge”
“Black edge” is a common term used on Wall Street. It symbolizes an informational advantage over other market participants that involves material nonpublic information. This means that a black edge is insider information that has somehow found its way into some institutional or retail investors before it was made widely available to the public. Having a black edge allows you to make investments or trades based on information that is not readily available, and easily predict how the market will react once this valuable news is released to the public.
The expression gained increased popularity once Sheelah Kolhatkar released a book bearing the same name. The book analyzes extensively the impact of Steven Cohen, and his firm SAC Capital Advisors. According to Sheelah Kolhatkar, SAC Capital Advisors was able to profit from insider information on numerous occasions. Making presumably risky bets, that turned out to always play out. Here is Sheelah Kolhatkar's interview promoting her book:
This practice is highly controversial, and it is punishable by law. Despite that, it is very difficult to prove in court whether a certain financial institution or an investor or trader acted based on a black edge.
Black edges threaten market stability
Black edges are not available to the common everyday investor. Allowing certain firms to access and trade based on nonpublic information is a major threat to market stability. As it questions the whole basis of how financial markets operate and could give some investors the perception that markets are rigged. In order to favor a small percentage of people. This is why it is so important for entities like the SEC to constantly be on the lookout. Identifying suspicious activities that might indicate the use of insider information.
A black edge is difficult to prove
Although it may sound simple, it is incredibly difficult and complex to prove that a certain person or entity had material nonpublic information. Additionally proving that the black edge was the basis of their investment or trading decisions. This is perhaps one of the reasons why it has been always difficult to prosecute anyone that is suspected to have a black edge because proving it is extremely complicated.
If there are no records, no witnesses, how can you prove someone had a black edge and that was the basis for a certain financial transaction? What is your evidence?
Once again it is nearly impossible to find evidence related to black edges. Any investor or institutions that use it are well aware of the implications of their actions. Therefore they would do anything in their power to conceal their illicit actions. Making it extremely difficult to prove and prosecute this type of case in court.
This leads us to one of the most important conclusions we can take from this, which is that markets should be extensively controlled. Failing to do so could create a confidence crisis in financial markets around the world that could have devastating effects.
Financial markets need to be fair
Above all financial markets have a sound and legal basis in which they operate. It allows every market participant to feel trust. This trust is what allows individuals to use financial markets whether they are speculating or investing for the long term. Failing to do so can create an extremely complicated scenario. If market participants' trust in sound markets is lost, that could have a devastating impact on financial markets across the globe. It could push some investors to completely avoid any stock market investment.
Trust is the basis for any financial market across the world. As an investor or trader, when you place an order you have to be sure that the person on the other side of the trade does not have material nonpublic information that is influencing their investment decision. Otherwise, nobody would feel compelled to invest or trade.
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