from inside information, that is, private information held by officers, directors, or major stockholders that has not yet been divulged to the pub- lic. The difficulty is that the definition of insiders can be ambiguous. Although it is obvi- ous that the chief financial officer of a firm is an insider, it is less clear whether the firms biggest supplier can be considered an insider. However, the supplier may deduce the firms near-term prospects from significant changes in orders. This gives the supplier a unique form of private information, yet the supplier does not necessarily qualify as an insider. These ambiguities plague security analysts, whose job is to uncover as much information as possible concerning the firms expected prospects. The distinction between legal private information and illegal inside information can be fuzzy. I. Introduction 3. How Securities Are Traded The McGraw−Hill Companies, 2001           96 PART I Introduction     An important Supreme Court decision in 1997, however, came down on the side of an expansive view of what constitutes illegal insider trading. The decision upheld the so- called misappropriation theory of insider trading, which holds that traders may not trade on nonpublic information even if they are not company insiders. The SEC requires officers, directors, and major stockholders of all publicly held firms to report all of their transactions in their firms stock. A compendium of insider trades is published monthly in the SECs Official Summary of Securities Transactions and Holdings. The idea is to inform the public of any implicit votes of confidence or no confidence made by insiders. Do insiders exploit their knowledge? The answer seems to be, to a limited degree, yes. Two forms of evidence support this conclusion. First, there is abundant evidence of "leak- age" of useful information to some traders before any public announcement of that infor- mation. For example, share prices of firms announcing dividend increases (which the market interprets as good news concerning the firms prospects) commonly increase in value a few days before the public announcement of the increase.6 Clearly, some investors are acting on the good news before it is released to the public. Similarly, share prices tend to increase a few days before the public announcement of above-trend earnings growth.7 At the same time, share prices still rise substantially on the day of the public release of good news, indicating that insiders, or their associates, have not fully bid up the price of the stock to the level commensurate with that news. The second sort of evidence on insider trading is based on returns earned on trades by insiders. Researchers have examined the SECs summary of insider