Is shorting your competition legal?

theres nothing illegal about shorting stocks.

naked short selling..yes

Pretty sure you just described insider trading

the real question here is......

if you were to analyze price data along with the volume of options being traded before said events, do other companies stocks really go down enough to profit off of in the event of a release that indicates positive results?

is this really an ARB opportunity?

It's perfectly legal, if you give me the names.

You are using material non-public information to make money. This is called insider trading.

I am pretty sure the CFA level I would cover it.

I just thought of something else though... If your company is NOT listed, and is a private company, you might potentially be able to trade on this. My compliance officers are in a meeting and sadly I couldn't ask them for an answer on this.

Amphipathic:

Let's say you own a biotech and discovered a cure for aids. Can you use this material non-public info to short other publicly traded pharmas and biotechs also working on HIV drugs?

Sorry if this is a naive question, CFA L1 didn't cover anything like this.

No... this is textbook insider trading.

As that information would undoubtedly be classified as non-public information, then it boils down to whether it is "material." Materiality is a legal term that condenses down to idea that if average people in the market would find that information important when making a decision to purchase or sell, then it's material. From what you're saying, yes it would be important because they are going to dominate their competition. Essentially, the SEC would smack you up for this. Rule of thumb; if it sounds like a clever way to use non-public information, it's illegal. Source: I've got a JD

Thanks for the info guys. This situation does not apply to me (unfortunately) but I've been curious about it.

The answer to your title question is that yes, you can absolutely short your competition (assuming your group has no explicit trading restrictions) with the caveat being (as stated above) that you cannot rely on material non-public information. I definitely used plenty of research that I gleaned from our PE portfolio company investments to trade (long/short) names in our peer group although many shops have fairly stringent restrictions on trading. My trading and analysis were primarily mosaic theory based rather than insider trading but there is certainly a gray area and you are better off not taking any unnecessary risks as the repercussions can obviously be significant. The key is over time to become an expert in your sector so that you can build a circle of competence that allows you to develop a trading edge.

As usual when college monkeys ask these question it worries me. Seriously... junkbondswap explained it best, there is a grey area and slippery slop ask Raj or Cohen if you do not believe so.

Seen this done in the energy industry and FERC/CFTC have punished people very hard, one day maybe the SEC will care to do the same, either case yes its total market manipulation.