Why is insider trading illegal?

It doesn't seem to harm anyone; yes it gives an unfair advantage to those in the know but since the market isn't zero sum it's not like the avg investor is getting screwed by a connected hedge fund manager. Unfairness that doesn't hurt anyone should not be illegal imho

Or am I missing an important point here that is the true reason for banning insider trades?

WSO Elite Modeling Package

  • 6 courses to mastery: Excel, Financial Statement, LBO, M&A, Valuation and DCF
  • Elite instructors from top BB investment banks and private equity megafunds
  • Includes Company DB + Video Library Access (1 year)

Comments (186)

May 1, 2011 - 9:16am

Insider trading can hurt investors - and that is the reason why it is illegal, not because its unfair.

öÖö
May 1, 2011 - 9:22am
bIastoise:
It doesn't seem to harm anyone; yes it gives an unfair advantage to those in the know but since the market isn't zero sum it's not like the avg investor is getting screwed by a connected hedge fund manager. Unfairness that doesn't hurt anyone should not be illegal imho

Or am I missing an important point here that is the true reason for banning insider trades?

Good points. Also, don't forget that insider trading would lead to more efficient capital markets and more accurate prices, which is (obviously) a good thing. I actually don't see the justification for these regulations. But, then again, I feel that way about most regulations...

Here's a short article on the topic: http://www.econlib.org/library/Enc1/InsiderTrading.html

Far from the clearly settled moral issue that naïve media pieces, movies, and novels would have it be, both the theory and the evidence of insider trading remain primitive and equivocal. Present rhetoric-and law-have far outrun present understanding.
  • 3
May 1, 2011 - 9:44am

The basic argument against insider trading is that insiders should not be permitted to earn such sums at the expense of uninformed traders. Yet in almost all other markets where information is important, insider trading is well established and widely accepted. For example, mineral leases are routinely bought by those better able than the sellers to evaluate a site's potential, as Texas Gulf Sulphur's behavior exemplified. Cattle buyers rely on superior estimates of what packers will pay when negotiating with ranchers. And so it goes, in markets for art, for real estate, for professional athletes-indeed in practically every market with substantial variations in prices. In all those markets a few buyers routinely profit from knowledge that most sellers do not possess, and a few sellers profit from knowledge that most buyers do not possess. Commentators rarely cast aspersions on such traders' ethics or contend that their transactions should be regulated because of the asymmetry in information. Why should securities markets be treated differently?

One reason frequently cited by policymakers and commentators is that insider trading undermines public confidence in the securities markets. If people fear that insiders will regularly profit at their expense, they will not be nearly as willing to invest. A similar argument is that companies prefer that their securities trade in "thick" markets-that is, markets with many traders, substantial capital available, and frequent opportunities to trade at readily observable prices. Efficient securities markets, it is argued, require a "level informational playing field" to avoid frightening away speculators, who contribute to securities market liquidity, and investors, who could invest their savings in markets with less risk of insider predation. Working on such a premise, over the last quarter-century the SEC has brought new and ever more stringent enforcement initiatives against insider trading.

Related to this argument is the harm that insider trading causes for "specialists." A specialist is someone whom the stock exchange appoints to ensure that a buyer of a particular security listed by the exchange can readily find a seller, and vice versa. These specialists must buy from or sell to any trader whose order cannot be offset against other orders arriving simultaneously. If, for example, a buyer wants a hundred shares of IBM, but no one wants to sell at that moment, the IBM specialist sells from his inventory of IBM stock. The specialist charges a "bid-ask spread" to cover the cost. A bid-ask spread implies that a slightly higher price is asked from someone who wishes to purchase a security than will be contemporaneously offered to someone who wishes to sell.

An inside trader, however, will sell securities to the specialist when only he knows that the securities will soon be worth less. After the price has fallen, the insider is free to repurchase the securities from the specialist for the lower price. If that occurs, the specialist loses money. If insider trading recurs, the security's specialist cannot continue indefinitely without recouping the funds being lost to informed traders. Therefore, specialists will insist on larger bid-ask spreads if insider trading is permitted and occurs often.

To investors, the bid-ask spread is a trading cost. If insider trading increased the spread but did nothing else, it would decrease a security's attractiveness relative to certificates of deposit, government bonds, and other assets. Raising new capital would, thus, be more costly for a firm whose securities were subjected to repeated insider trading. Hence, all else being equal, insider trading makes it harder for a firm to raise money when opportunities to undertake new projects arise.

But insider trading might also have offsetting benefits. Insider trading can be profitable only if securities prices move. Therefore, insiders hoping to trade on inside information may try to get the price to move by cutting the company's costs, seeking new products, and so on. While such actions benefit the insider, they also benefit the firm's security holders as a group.

Of course, insiders can also profit by borrowing and then selling securities when the price is apt to fall. Some argue that insider trading is more likely to harm companies because damage is easier to inflict. That argument, in turn, has been countered; major actions by a company require teams, not individuals. Efforts to damage a firm would likely be brought to the attention of higher management or shareholders by some ambitious team member looking to capitalize on the resulting gratitude. Unfortunately, no evidence has been presented to help resolve this debate.

A number of financial economists and law professors take the position that insider trading ought to be legal. They base their case on the proposition that insider trading makes the stock market more efficient. Presumably, the inside information will come out at some point. Otherwise, the insider would have no incentive to trade on the information. If insider trading was legal, this group argues, insiders would bid the prices of stocks up or down in advance of the information being released. The result is that the price would more fully reflect all information-both public and confidential-about a company at any given time.

Even if insider trading sometimes creates more harm than good, rules against it could be contractual (e.g., "employees of our company who trade on material, nonpublic information forfeit their pension rights") rather than mandated by government. Because the circumstances facing companies differ, insider trading might be advantageous for some companies and not for others. And if so, would it not be sensible to permit firms to "opt out" of insider trading enforcement? Interestingly, Texas Gulf insider Charles Fogarty was subsequently elevated to chief executive officer of his company. Moreover, following Fogarty's death, another insider, who was also known to have traded on the same information, was elevated to replace him. Clearly, Texas Gulf's board of directors and shareholders must not have found the trading completely reprehensible. Yet the law makes no provision for opting out, implicitly assuming that insider trading injures all companies. Policymakers never seriously ask who is harmed, who is helped (other than the insiders), and by how much.

  • 2
Best Response
May 1, 2011 - 9:44am

There are two sides to every trade - the buyer and the seller. On the ethical side, no-one wants to be buying a lemon. Imagine buying a car from someone only to have it break down the next day - the guy who sold you the car knew it was going to break down, neglected to tell you, and now you can't do anything about it. That's just bad business.

On the economic side, for an efficient market to work, when you buy a stock, you have to believe that the person on the other side of that exchange is selling to you in good faith. Without regulations against insider trading, you would have no incentive to trade because you'd believe that the person selling to you is selling on insider information. Thus, all stocks would internalize that risk and trade at a much lower price to account for it - as a result, the overall value of the equities market would fall and the economy would slow.

May 1, 2011 - 10:26am
redninja:
There are two sides to every trade - the buyer and the seller. On the ethical side, no-one wants to be buying a lemon. Imagine buying a car from someone only to have it break down the next day - the guy who sold you the car knew it was going to break down, neglected to tell you, and now you can't do anything about it. That's just bad business.

Two issues:

1) In cases where fraud is involved, there are courts.

2) People generally need to do their due diligence in the first place. It's not necessarily your job to tell me everything you know about a stock before hand.

redninja:
On the economic side, for an efficient market to work, when you buy a stock, you have to believe that the person on the other side of that exchange is selling to you in good faith. Without regulations against insider trading, you would have no incentive to trade because you'd believe that the person selling to you is selling on insider information. Thus, all stocks would internalize that risk and trade at a much lower price to account for it - as a result, the overall value of the equities market would fall and the economy would slow.

You have that problem now, too. Why does someone want to sell me a stock? He thinks it's over valued. Why do I want to buy a stock? I think it's undervalued. It's people pitting their opinions against one another.

Even if you had inside information, it wouldn't be 100% clear what the "right" price is. So, just like now, people would be betting their opinions against one another (even if they have the same inside information).

  • 3
  • 1
Learn More

300+ video lessons across 6 modeling courses taught by elite practitioners at the top investment banks and private equity funds -- Excel Modeling -- Financial Statement Modeling -- M&A Modeling -- LBO Modeling -- DCF and Valuation Modeling -- ALL INCLUDED + 2 Huge Bonuses.

Learn more
May 1, 2011 - 11:25am
econ:
redninja:
There are two sides to every trade - the buyer and the seller. On the ethical side, no-one wants to be buying a lemon. Imagine buying a car from someone only to have it break down the next day - the guy who sold you the car knew it was going to break down, neglected to tell you, and now you can't do anything about it. That's just bad business.

Two issues:

1) In cases where fraud is involved, there are courts.

2) People generally need to do their due diligence in the first place. It's not necessarily your job to tell me everything you know about a stock before hand.

redninja:
On the economic side, for an efficient market to work, when you buy a stock, you have to believe that the person on the other side of that exchange is selling to you in good faith. Without regulations against insider trading, you would have no incentive to trade because you'd believe that the person selling to you is selling on insider information. Thus, all stocks would internalize that risk and trade at a much lower price to account for it - as a result, the overall value of the equities market would fall and the economy would slow.

You have that problem now, too. Why does someone want to sell me a stock? He thinks it's over valued. Why do I want to buy a stock? I think it's undervalued. It's people pitting their opinions against one another.

Even if you had inside information, it wouldn't be 100% clear what the "right" price is. So, just like now, people would be betting their opinions against one another (even if they have the same inside information).

All well and good, but there would likely be a reflection in the stock price. When C-level executives, members of the board, etc. are allowed to trade without notification in advance and on non-public information, you're going to have that reflected in the stock prices. This would likely increase the cost of capital to corporations. Whether or not it would increase enough to justify a ban, I'm not sure, but it isn't completely black and white.

Further, of all people who would likely get screwed, it would be a smaller retail investor or somebody that has their retirement in some smaller mutual fund, where they are not privy to the same information as a more well connected hedge funds manager or obviously the C-executives and their friends/family. Due diligence becomes a bit less relevant when there is material information that cannot be discovered by outsiders.

May 1, 2011 - 11:33am
econ:
redninja:
There are two sides to every trade - the buyer and the seller. On the ethical side, no-one wants to be buying a lemon. Imagine buying a car from someone only to have it break down the next day - the guy who sold you the car knew it was going to break down, neglected to tell you, and now you can't do anything about it. That's just bad business.

Two issues:

1) In cases where fraud is involved, there are courts.

2) People generally need to do their due diligence in the first place. It's not necessarily your job to tell me everything you know about a stock before hand.

redninja:
On the economic side, for an efficient market to work, when you buy a stock, you have to believe that the person on the other side of that exchange is selling to you in good faith. Without regulations against insider trading, you would have no incentive to trade because you'd believe that the person selling to you is selling on insider information. Thus, all stocks would internalize that risk and trade at a much lower price to account for it - as a result, the overall value of the equities market would fall and the economy would slow.

You have that problem now, too. Why does someone want to sell me a stock? He thinks it's over valued. Why do I want to buy a stock? I think it's undervalued. It's people pitting their opinions against one another.

Even if you had inside information, it wouldn't be 100% clear what the "right" price is. So, just like now, people would be betting their opinions against one another (even if they have the same inside information).

But i think there's an inherent difference in betting on a stocks true valuation and actually knowing a stocks true valuation. having inside information is different than making a valuation and making a directional bet

May 1, 2011 - 12:20pm

Is this question a joke? Insider trading takes capital from productive investors and redistributes it to frauds. It harms the integrity and functioning of the market, harms the investors on the other side of the trade, and destroys value/capital through inefficient allocation.

The idea that no one is harmed is totally sociopathic. When someone trades on inside information or uses other manipulative practices it means my state's pension fund doesn't perform like it should and I'm stuck with higher taxes. We give banks/bankers enough legal ways to reallocate capital to themselves without actually doing anything productive. The suggestion that we should just allow outright theft is disgusting.

May 1, 2011 - 12:52pm
kote:
Is this question a joke? Insider trading takes capital from productive investors and redistributes it to frauds. It harms the integrity and functioning of the market, harms the investors on the other side of the trade, and destroys value/capital through inefficient allocation.

Why does someone always get laughed at, just for questioning the status quo? I post an article by a guy who's obviously given it a lot of thought and goes to the trouble to write up a thoughtful article laying out his position, and he gets laughed at without anyone actually attacking his arguments. I'm not saying you have to agree with him or me, but when you just dismiss it outright, you're not even using your brain and making an argument/case.

kote:
The idea that no one is harmed is totally sociopathic.

No one said nobody is harmed. People are obviously harmed by the insider trading laws too, so it's besides the point.

  • 3
  • 1
May 1, 2011 - 1:09pm
econ:
No one said nobody is harmed. People are obviously harmed by the insider trading laws too, so it's besides the point.

That's like saying we should allow theft because thieves are harmed when we throw them in jail, or they're harmed by not possessing my stuff. If it's not obvious how twisted and sociopathic this is then nothing I can say will help.

I'm not laughing, by the way. I'm scared as all hell for our future if people are actually willing to entertain these arguments. And I did list why insider trading is harmful in my original post. Redninja also got the mechanics of it right, just without going into the reallocation of wealth from productive investors to fraudulent insiders.

May 4, 2011 - 7:55pm
econ:
kote:
Is this question a joke? Insider trading takes capital from productive investors and redistributes it to frauds. It harms the integrity and functioning of the market, harms the investors on the other side of the trade, and destroys value/capital through inefficient allocation.

Why does someone always get laughed at, just for questioning the status quo? I post an article by a guy who's obviously given it a lot of thought and goes to the trouble to write up a thoughtful article laying out his position, and he gets laughed at without anyone actually attacking his arguments. I'm not saying you have to agree with him or me, but when you just dismiss it outright, you're not even using your brain and making an argument/case.

kote:
The idea that no one is harmed is totally sociopathic.

No one said nobody is harmed. People are obviously harmed by the insider trading laws too, so it's besides the point.

Actually someone did say that no one is harmed...

bIastoise:
It doesn't seem to harm anyone
May 1, 2011 - 1:11pm

rampant insider trading would cause the general public to lose faith in the capital markets. i live in a country where the stock market is dominated by large entities trading on insider info and you constantly see unexplained large changes in stock prices. i would never put a dime in there. fundamentals dont count for shit. Im much more comfortable trading the US or european markets... at least there is "some" sense in what is driving prices.

May 1, 2011 - 1:22pm

noobstar:
rampant insider trading would cause the general public to lose faith in the capital markets. i live in a country where the stock market is dominated by large entities trading on insider info and you constantly see unexplained large changes in stock prices. i would never put a dime in there. fundamentals dont count for shit. Im much more comfortable trading the US or european markets... at least there is "some" sense in what is driving prices.

People trading on inside info is senseless? Than isn't that the market you should want to play?

  • 2
  • 1
May 1, 2011 - 1:50pm
econ:
noobstar:
rampant insider trading would cause the general public to lose faith in the capital markets. i live in a country where the stock market is dominated by large entities trading on insider info and you constantly see unexplained large changes in stock prices. i would never put a dime in there. fundamentals dont count for shit. Im much more comfortable trading the US or european markets... at least there is "some" sense in what is driving prices.

People trading on inside info is senseless? Than isn't that the market you should want to play?


if people are trading on inside info, and taking large positions (which of course they will since they know key info), it results in large price fluctuations. how do i tell the difference between a speculative investment and an investment based on inside info? to me, the entire market would appear to be speculative. its called inside info cause the public doesnt know about it. as an outsider, u are at huge disadvantage cause u wont be able to time ur trades for shit.
May 1, 2011 - 11:32pm

Econ, i would think that someone who is so adamantly against excessive taxation (theft) because it is essentially unfair and limits our personal freedoms would be able to see the similarities between insider traders and thieves.
My purchase of public securities for a LBO target that my shop is pursuing, knowing full well when the final bid deadline and announcement deadline will be, is the same thing as me being a bank employee with knowledge of the vault code and stealing the contents of the safe.

May 2, 2011 - 10:09am

I actually wrote my MSc thesis on the ethics of insider trading. Got an OK grade as well. This was spurred on by a European Commission survey on whether insider trading regulations should be extended to commodities, and my observation that every organisation that replied seemed to have either no clue or have a direct stake in the outcome.

Basically, there's two avenues of thought - 'rights' ethics (the word is "deontological"), and 'utilitarian' ethics. Insider trading could be found unethical according to either of these.

Rights ethics deals with what is right and wrong in itself, like the situation has some kind of moral value. An example of a rights-based argument would be "insider traders misuse information that belong to the company, and this is immoral". An example of a utilitarian argument would be "insider trading reduces faith in the markets, economic growth and human happiness and this is bad". There's a million arguments that can be classified under either category.

If you really hate insider trading though, well, in several places in the world it's legal and for large parts of history it was, but the world didn't collapse then either.

Let me know if anyone is obsessively interested enough to want it.

May 2, 2011 - 6:05pm
SpiderMonkeyOhYes:
Let me know if anyone is obsessively interested enough to want it.

Please send it to me.

May 2, 2011 - 11:23am

Although I think the OP has a strong point I had a similar inquiry explained to me this way...

A legalization or deregulation of insider trading would likely spawn a rise in the element of collusion. A point at which regulations more stringent than the current insider trading laws were likely to follow in order to eliminate a subsequent risk of failing consumer sentiment.(i.e., harsher punishments for violators and more shades of gray in an already charcoal arena) By eliminating the eligibility of those with information not privy to the average consumer, the market is considered to be more efficient.

I took this to mean that in the process of trying to create a level playing field for ALL investors there are some market inefficiencies, and the current SEC regulations against insider trading are the least detrimental by comparison to long term worst case scenarios.

I disagree with insider trading being equated to a vault combination.

I personally feel it would create a more efficient machine and agree with points identified by SpiderMonkey. Over time, it would likely result in the creation of a premium paid for direct to market information (fraught with lemmings and posers, another element which complicates matters for consumers) in addition to the existing trading markets. In all reality, the average consumer is at just as great a disadvantage with current insider regulations as it would be without. They would just know it instead of being fooled into believing in a fantasy world of perfect information.

May 3, 2011 - 12:29am
ragnar danneskjöld:
Although I think the OP has a strong point I had a similar inquiry explained to me this way...

A legalization or deregulation of insider trading would likely spawn a rise in the element of collusion. A point at which regulations more stringent than the current insider trading laws were likely to follow in order to eliminate a subsequent risk of failing consumer sentiment.(i.e., harsher punishments for violators and more shades of gray in an already charcoal arena) By eliminating the eligibility of those with information not privy to the average consumer, the market is considered to be more efficient.

I took this to mean that in the process of trying to create a level playing field for ALL investors there are some market inefficiencies, and the current SEC regulations against insider trading are the least detrimental by comparison to long term worst case scenarios.

I disagree with insider trading being equated to a vault combination.

I personally feel it would create a more efficient machine and agree with points identified by SpiderMonkey. Over time, it would likely result in the creation of a premium paid for direct to market information (fraught with lemmings and posers, another element which complicates matters for consumers) in addition to the existing trading markets. In all reality, the average consumer is at just as great a disadvantage with current insider regulations as it would be without. They would just know it instead of being fooled into believing in a fantasy world of perfect information.

Nice handle. Had to get all fancy and out do me, huh?

This thread is ridiculous. There is no such thing as a victimless crime. Is it rampant in industry, and sometimes even regarded as compulsory by some that need to obtain "alpha", yes. There's no point in arguing whether it helps liquidity, market microstructure, etc It''s there and always will be. It's a question of where your morals and ethics stand. Your can be upright or be a dirtbag, it's your life and your choice. Honestly, you'll find most people won't judge you (and honestly, don't give a shit). Just don't try to rationalize bad choices.

May 2, 2011 - 11:54am

Hi guys - all these arguments are well-reasoned and eloquently put. Please keep this kind of civil and intelligent discussion out of WSO, it is clogging up the servers. Please stick to debating which group has the best exit opps and what exactly constitutes a non-target/semi-target/target school.

Thanks.

Hi, Eric Stratton, rush chairman, damn glad to meet you.
  • 2
May 2, 2011 - 12:05pm

The one rather interesting proposal I remember was to make price-decreasing (shorting or selling) insider trading information legal. Basically the argument is that there's a lot of people in the market who benefit from talking up prices but very few who benefit from talking down prices, leading to impaired allocative efficiency. Some ethical issues you still have (the buyer would have less information and be unhappy in retrospect) but many of the managerial issues associated with price-increasing insider trading (like inflating accounting numbers) would not be there. I can agree it's really unlikely to be implemented in any current developed nation, but an interesting thought experiment.

May 2, 2011 - 12:23pm

^^ So instead of incentivizing insider managers to perform well, occasionally fudging to the upside, you'd incentivize them to tank the company while holding short positions?

Edit: I didn't mean "you" personally, just whomever might be doing this :). I noticed you didn't actually suggest we go this route. It's an interesting thought.

May 2, 2011 - 12:18pm

The one other point I think it's important to remember (not related to above), is that the stock market, excluding dividends, is zero-sum on a cash flow basis. Any realized gains come either through dividends or from other market participants' cash losses. Any gains from insider trading necessarily come 100% at the expense of other market participants. It's simple math. The money doesn't appear out of nowhere.

This is regardless of any structural harm caused by the perception of unfairness.

May 2, 2011 - 1:18pm
kote:
The one other point I think it's important to remember (not related to above), is that the stock market, excluding dividends, is zero-sum on a cash flow basis. Any realized gains come either through dividends or from other market participants' cash losses. Any gains from insider trading necessarily come 100% at the expense of other market participants. It's simple math. The money doesn't appear out of nowhere.

This is regardless of any structural harm caused by the perception of unfairness.

I take a different view. Because each trader's cost basis and percieved exit prices are different, the stock market isn't necessarily a zero sum game when played out in the moment-to-moment perceptions of its participants. You cannot know without insider information of a major price movement with 100% certainty (they don't call 'em certainty funds, they call 'em hedge funds). In addition, there are utility arguments in play. Really the only zero-sum game comes in terms of unrealized cash flows, which are impossible to predict.

I get what you're saying, but I think the psychological and mathematical reality is a bit more complex.

"Dude, not trying to be a dick here, but your shop looks like a frontrunner for the cover of Better Boilerrooms & Chophouses or Bucketshop Quarterly." -Uncle Eddie
  • 3
May 2, 2011 - 1:35pm

Trades just move cash. No cash is ever created in the process. If an insider increases the cash in his bank account, someone else has lost the same amount.

The market is abstract and anonymous. There's moral hazard in not seeing the victim(s). Reality though is not complex at all. If you make money on a trade, someone else loses money. Period.

...and yeah, we got trolled, but this made front page and it's a slow day :-/.

May 2, 2011 - 5:22pm

If you allowed insider shorting there would absolutely be an incentive for someone to sabotage the firm they work at. This would however a) generally work against their own interest in terms of salary, b) lead to their dismissal and blackballing for the rest of their life, c) make them subject to claims for damages, and if there's any suspicion the motive would be easy to establish.

At the same time you should be able to avoid more corporate fraud. Take Enron for example. What if everyone who didn't get stock options had been allowed to short the stock from day 1? You would have seen some people take big shorts and then a lot of leaks to the market, at an early stage, before it became as big as it did. Arguably if there is a problem at a firm, then any period of time this problem isn't known to the market is a period the stock is mispriced. Remember that positive news tend to be published right away, but everyone involved has an incentive to keep negative news secret. You would even say that stockholders and managers (one supposed to be 'checking up on' the other) both have an incentive to overstate positive news and hide negative, so managers would never be "punished" for doing that by anyone.

The overall effect should be that there would be a lot more negative rumours floating around in the market about every company. This would bring prices down, one-off, and when companies develop problems they would be reflected in the market a lot sooner, to the betterment of price accuracy. Arguably however the situation today is that companies are impenetrable fortresses of Everything Great and it's only if the shit REALLY hits the fan that problems get aired out, and then you get everything at once. If people had an incentive to short then the flow of information regarding companies would be a lot more nuanced.

The argument isn't mine and was made by someone else many years ago, but it's an interesting thought.

May 2, 2011 - 5:24pm

Insider trading shouldn't be legalized because I want trading to stay as a meritocracy.

"The code of competence is the only system of morality that's on a gold standard." - Francisco d'Anconia
May 3, 2011 - 2:43am

That's a pretty simplistic view, Ragnar. Where does research end and insider trading begin? Just because I've gone to the effort to get to know a CEO (for example) and know his company inside out and backwards and am therefore privy to information the investing public has neither the willingess nor ability to attain, that makes me immoral?

May 4, 2011 - 10:36pm

Because lawmakers are a bunch of money-hating commies, DUH.

"The power of accurate observation is commonly called cynicism by those who have not got it." - George Bernard Shaw
May 5, 2011 - 12:16am
"The power of accurate observation is commonly called cynicism by those who have not got it." - George Bernard Shaw
  • 2
May 6, 2011 - 6:32am
chi312:
BECAUSE MAKING MONEY SHOULD NEVER BE THAT EASY!!!

Think about it, insider trading is legal, suddenly no wants to make an honest living they just want to exploit knowledge to make money out of thin air.

That's a silly argument. I think we should also put a ball and chain around the ankle of preschool teachers, since I think their job is too easy.

If inside traders shouldn't be able to make money off superior knowledge, then why should anyone else? I think we should outlaw college professors then too.

  • 1
Jan 16, 2018 - 12:45pm

So you know a guy at a pharma company that says their hyped up new patent didn't pass through the FDA...you then dump all your shares. Is this superior information acquired through intellectual superiority? No, you just know a guy...

Jan 16, 2018 - 2:01pm

Insider Trading - Illegal? (Originally Posted: 03/07/2011)

Why is insider trading illegal?

and WHYYYYY does the US put so much time, money, and effort into the whole steroids in pro baseball thing?

none of it makes any sense to me... perhaps i'm just a stupid n00b

Jan 16, 2018 - 2:04pm

Think hockey for a minute: it's a fast paced, physical game, but there are rules. If you don't follow the rules, you go to the penalty box. In finance, you are the player, the SEC is the ref, and the penalty box is jail/unemploymnt.

Imagine this: I'm trading inside info or shooting steroids and you have to compete against me. Not fair right? So now, you start cheating.....the whole system falls apart very quickly because no one is following the rules. These aren't ethical abstractions: HUGE amounts of money is at stake. In this industry, it's also, usually, OTHER PEOPLE'S MONEY. This is key. If an industry can't be trusted, people will not put their money in it.

THAT'S why it's illegal.

Get busy living
  • 2
Jan 16, 2018 - 2:05pm

You guys are talking about how rules make up a system, but OP is looking for the logic behind those rules.

"You stop being an asshole when it sucks to be you." -IlliniProgrammer "Your grammar made me wish I'd been aborted." -happypantsmcgee
Jan 16, 2018 - 2:10pm

"Insider trading was legal until 1968"

People have extremely short memories and most people don't realize that for the majority of our country's history: we were on a gold standard, there was no income tax, drugs were legal, there was no entitlement state, congress had to declare wars, etc.

Jan 16, 2018 - 2:11pm

I don't understand how anyone gets access to that kind of info, if they don't work at the company whose stock they are trading in. Like that guy Zvi Goffer. It makes no sense to me.

You'd think it would be more difficult to get someone with access to just give up their companies' secrets.

Jan 16, 2018 - 2:13pm

to go one further, they have to prove that they garnered the information from you.

The following events would not be enough to get a conviction:

A knows B, A is a hedge fund manager, B is the audit partner of a major client C

B knows the results of the client are about to be way above expectations.

A and B play golf together. During which B tells A that client C is about to go skywards **************

A buys these shares and sells htem shortly afterwards for a nice chunky profit.

A and B both committed crimes, but unless you taped that conversation (have it in a sauna/steamroom if you're really paranoid), you cant prove it. Even if you can prove they played golf together, you have nothing.

Good luck competing against that in any non quant trading role if you're playing with a straight bat.

Jan 16, 2018 - 2:14pm

I KNEW YOU WERE LYING!!!!! thank god you didnt leave

I eat success for breakfast...with skim milk
  • Anonymous Monkey's picture
  • Anonymous Monkey
  • Rank: Chimp
Jan 16, 2018 - 2:21pm

Insider Trading: Serious shit or latest populist fad? (Originally Posted: 11/24/2010)

So it looks like things are starting to get nasty for some hedge funds, basically all leading back to SAC Capital, which released a notice that it was subpoenaed by the Feds. Does anyone see this breaking down the secret curtain the industry prides itself on, or is this just another attempt to appease to public outcry? The more things change, the more they stay the same, but the average American will probably want to tar and feather Steve Cohen purely on the basis of his annual paycheck.

Jan 16, 2018 - 2:23pm

Yeah, this is a publicity stunt. Take out a couple people, look like a hero punishing the evil "banksters" and move on. Nothing fundamental will change.

Jan 16, 2018 - 2:24pm

What I want to know is who they pissed off, or who's going to benefit from this. It all trails back to Raj and an unsuccessful suit on SAC right after, that case was put to bed but somebody decided it'll be good for his/her career to bring it back.

People like Coldplay and voted for the Nazis, you can't trust people Jeremy
Jan 16, 2018 - 2:25pm

I wouldn't rush to judgment on this one, guys. It's starting to look like this thing has legs. I don't know where they're going with it, but Janus and Wellington just got subpoenaed. Those guys are huge. I originally wrote this off as another witch hunt, but now I'm starting to wonder.

Jan 16, 2018 - 2:26pm

This was actually the subject of my post last night but I had to run. I'm fairly certain that Cohen will be branded the new Boesky here, it's obvious that they want the SAC people and let's face it, they don't really have a stellar reputation. Hell,they might even bring in that weird analyst who was made to take estrogen.

Add Cohen kinda admitting his shady deals before and the fact that his ex-wife accused him of insider trading during their divorce, this crackdown really is a serious matter for SAC.

Wonder how Citadel and the Mutual funds come in though.

People like Coldplay and voted for the Nazis, you can't trust people Jeremy
  • 1
Jan 16, 2018 - 2:27pm

Nah, boys. No PR stunting here. This is the big one. You gotta understand the mentality. The government as a whole is starting to accept the fact that there won't be a real recovery. The past is gone and the current unemployment figures are not going to change a whole lot (for the better).

In other words, somebody absolutely has to fall on the sword and for real, this time around. The initial blow back post crisis was your typical "production for the plebs" so-to-speak. Now it is becoming clear for Washington, that in order to justify its own growth and even increasing spending (sorry, this won't change which ever party is in charge) habits they have to fund themselves and throw money at the deficit via a different sort of "search and seizure".

The number one reason you know it's for real is that relative hush-hush way this has come about. A Federal Grand Jury in New York has already heard evidence...before the story even came to press.

That means that heads are going to roll, boys. Get ready. This ain't Dodd-Frank. This is the big one.

Jan 16, 2018 - 2:28pm

The persecution of successful finance people is disgusting. Instead politicians need to tell those fat lazy Americans to accept personal responsibility and not live beyond their means. But of course that will never happen because everyone has to pander to the lowest common denominator. Democracy has failed this country.

Jan 16, 2018 - 2:34pm

Legalizing Aspects of Insider Trading (Originally Posted: 08/01/2013)

SAC Capital's dilemma has been a bit of a springboard for arguing what really constitutes as insider trading; more or less if you ask 100 people that question, you'll get 100 different answers back. (Source: Matt Levine, DealBreaker)

  • If you have no information, just index. That is the baseline.
  • If you have some information, enjoy making faith trades!
  • If you have better information, that's nice for you.
  • If you have really good information, and are deeply sourced in the industry that you cover, then that's super great and you can make a lot of money.
  • If you have really really good information, and are spending too much time at your Hamptons share house with CFOs, you're probably going to jail.

SAC ended up just over the line from "awesome amount of information" to "too much information."

But, where is that line? Where is it defined?

Bethany McLean has the best description of where it is right now:

But the line between what's insider trading and what isn't is most definitely not the line between what information an average investor can access, and what information a hardworking hedge fund manager who can spend thousands of dollars and hundreds of hours on expert research can access. "I shudder to think how much of my alpha comes from failed individual investors," one hedge fund manager tells me. The group of analysts could have done almost everything short of getting a source inside Dell. They could have worked Dell's investor relations department, used sources at other companies, called customers to do so-called "channel checks" - research on what's selling - set up meetings with management and industry analysts and pooled all their information. That's all legal. "Edge," as they call it in the hedge fund community, can refer to inside information, but it can also be that little bit of knowledge gleaned from incredibly hard work. And within those circles, "edge" gets shared - but not with you.

Emphasis added but that emphasized sentence is not quite right – as she says in the next sentence, they could talk to Dell IR, which apparently disclosed material nonpublic information with some frequency.

They could talk to the Dell CFO at his beach house for that matter, as long he wasn't disclosing:

(1) material nonpublic information
(2) in breach of a duty of confidentiality
(3) in exchange for some benefit to himself.

All of those concepts can blur.

If you're just on the right side of that blurry line, you get very rich, while if you're just on the wrong side you get very sent to jail.

The fact that SAC more or less ended up doing both is a sign that the line is too blurry.

"If you have enough assets plus passive income to cover your personal lifestyle expenses for the rest of your life, and that money allows you to work at something you love, without concern for the amount of compensation, then you are wealthy."
  • 2
Jan 16, 2018 - 2:35pm

This is a non issue. Insider trading is already legal in all markets besides equities. It is perfectly legal to trade with the aid of insider information when you trade commodities, mortgages, municipal bonds, government bonds, derivatives etc.

I am not cocky, I am confident, and when you tell me I am the best it is a compliment. -Styles P
Jan 16, 2018 - 2:36pm

eokpar02:

This is a non issue. Insider trading is already legal in all markets besides equities. It is perfectly legal to trade with the aid of insider information when you trade commodities, mortgages, municipal bonds, government bonds, derivatives etc.

Source? I never knew this and I'm genuinely curious.

"My dear, descended from the apes! Let us hope it is not true, but if it is, let us pray that it will not become generally known."
Jan 16, 2018 - 2:38pm

Illuminate:

eokpar02:

This is a non issue. Insider trading is already legal in all markets besides equities. It is perfectly legal to trade with the aid of insider information when you trade commodities, mortgages, municipal bonds, government bonds, derivatives etc.

Source? I never knew this and I'm genuinely curious.

Source: common knowledge.

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
  • 1
Jan 16, 2018 - 2:39pm

Also, this is all pretty much directly ripped from Matt Levine's recent Dealbreaker article (including the graph), so a source attribution is definitely in order...

http://dealbreaker.com/2013/07/push-to-make-insider-trading-legal-comes…

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
Jan 16, 2018 - 2:41pm

RSLA:

Just added a source, I am indeed sorry I forgot to cite him! My intent was to bite-size it for WSO.

No worries, it happens.

"For all the tribulations in our lives, for all the troubles that remain in the world, the decline of violence is an accomplishment we can savor, and an impetus to cherish the forces of civilization and enlightenment that made it possible."
Jan 16, 2018 - 2:45pm

NorthSider:

Illuminate:
eokpar02:

This is a non issue. Insider trading is already legal in all markets besides equities. It is perfectly legal to trade with the aid of insider information when you trade commodities, mortgages, municipal bonds, government bonds, derivatives etc.

Source? I never knew this and I'm genuinely curious.

Source: common knowledge.

I'm not familiar with all of these markets but this is probably right. You guys should see distressed debt, wow, that is the wild west. I guess the SEC just assumes that everyone has their big boy diaper on before they get involved with distressed debt, because I have seen situations where you can literally track it out and see that certain firms were trading on inside information (i.e., inside the company, conflicted, but still buying or selling more debt before the news breaks). Some times you get groups of debt holders trying to take advantage of other debt holders within the same class based on the possession of material inside information. Really crazy situations, no SEC action whatsoever.

I think the SEC gets butt hurt about equities because that is where most retail investors are, so in theory there should be some attempt to make equities the most level playing field, even though that attempt has clearly failed on a wide scale basis.

Jan 16, 2018 - 2:46pm

Why We Should Legalize Insider Trading (Originally Posted: 12/02/2012)

James McDermott. Jeffrey Skilling. Martha Stewart. Raj Rajaratnam. Samuel Waksal. They've all been indicted for the financial taboo of trading on private information profitably. Recently, Steven Cohen's $14B HF SAC Capital Advisors is the latest whipping boy and highest profile member to potentially be added to CNBC's exclusive list of Famous Insider Trading Cases. However, financial history reveals that before the 1960's such practices were the norm. Fast forward to 2012 and the reality of its enforcement according to Henry G. Manne, Dean Emeritus at George Mason University is that it's, "…arbitrary, capricious, political and extremely inefficient." Read on to see where I take bIatoise's post, Why Is Insider Trading Illegal?

So What's Happening Now?
Mathew Martoma, a former portfolio manager at SAC affiliate, CR Intrinsic Investors is accused of using private information (i.e. read property rights) through his six year friendship with Dr. Sidney Gilman, a University of Michigan neurologist involved with the clinical trials on an Alzheimer's drug. He then profited $276M on both ELN and WYE for SAC from that private information.

But Don't Insider Trading Laws Make the Market Fair?
Some think that such laws serve to protect the market's integrity such as HF Manager David Berman at Durban Capital where he's quoted as saying,

It makes markets more robust. That gave us biotech, Wal-Mart, Microsoft. Companies raise capital in U.S. markets because of that confidence."
I think he's wrong! The reality is financial markets aren't fair, information asymmetry and privileges exist to varying degrees.

• Consider the price action before a takeover bid. In March 2011, a study published in the Journal of Multinational Financial Management found abnormal returns of nearly 7% during the 50 trading days before deal announcements.
• How about the long-standing double standard set by Congress? According to ProCon, until 1977 representatives had no restrictions on their non-congressional income and no rules about disclosing their finances or investments. Yet, it was only this year that the STOCK Act ended Congressional insider trading altogether.

Why A Free-Market Solution?
Investor capital doesn't find the best outlets itself, HF such as SAC spot various opportunities and quickly directs its funds that way. Market prices embody this information and it's this pricing disparity which creates profits and efficiently values securities until it's fully priced-in and the reward for doing so effectively is profit.

Warren C. Gibson, Lecturer in Economics and Engineering at San Jose & Santa Clara Universities explains that,

When the dissemination of infromation about a firm is blocked by insider-trading restrictions, that firm's shares are mispriced. If the news is bad, investors will buy at prices they would not have paid had they heard the news. Movement of capital toward more productive uses is inhibited. If it's good, some sellers will let go of their shares at prices they would not have accepted."


So what do you think monkey's…is the latest witch hunt against SAC justified OR do insider trading laws contribute to a partially inefficient market?

LET'S HEAR IT!

Who Am I? | See what GMngmt is all about at About.Me
  • 2
Jan 16, 2018 - 2:47pm

You are an idiot.

"The higher up the mountain, the more treacherous the path" -Frank Underwood
Jan 16, 2018 - 2:53pm

Barboone:
You are an idiot.

Simple, accurate and well put.

OP, consider this before posting.

Array
Jan 16, 2018 - 2:50pm

I think Berman is right, the issue is all about investor confidence and market efficiency. Insider trading rules are not perfectly enforced, but were they not enforced at all many investors would be very wary to trade. Trading in the capital markets is somewhat predicated on the assumption that you aren't buying something that's about to get bagged while the other side knows this. It's similar to the Lemon problem in economics. If insider trading were freely allowed, investors would have to assume there is a higher probability that every purchase they make is a Lemon (i.e., the seller on the other side has non-public information that indicates the stock is going to get tanked). That would mean less trading and at wider spreads - buyers and sellers would be less likely to agree on a price because neither would trust the other. This could have disastrous effects on liquidity and the cost of capital to firms in US equity markets.

  • 3
Jan 16, 2018 - 3:11pm

Boothorbust:
I think Berman is right, the issue is all about investor confidence and market efficiency. Insider trading rules are not perfectly enforced, but were they not enforced at all many investors would be very wary to trade. Trading in the capital markets is somewhat predicated on the assumption that you aren't buying something that's about to get bagged while the other side knows this. It's similar to the Lemon problem in economics. If insider trading were freely allowed, investors would have to assume there is a higher probability that every purchase they make is a Lemon (i.e., the seller on the other side has non-public information that indicates the stock is going to get tanked). That would mean less trading and at wider spreads - buyers and sellers would be less likely to agree on a price because neither would trust the other. This could have disastrous effects on liquidity and the cost of capital to firms in US equity markets.

If that were true, why does anyone buy bonds, commodities, futures, etc? The government says its perfectly legal to trade those things with insider information.

I am not cocky, I am confident, and when you tell me I am the best it is a compliment. -Styles P
  • 2
Jan 16, 2018 - 2:52pm

Going Concern:
Hahahaha, what a ridiculous thread. Keep em coming! Maybe we should also let the camera crews at the World Series of Poker have a spot on the table.

Maybe televise it on ESPN, then sponsor it by some beef jerky? How ghastly.
Jan 16, 2018 - 2:55pm

"I think he's wrong! The reality is financial markets aren't fair, information asymmetry and privileges exist to varying degrees."

So your argument is that since the markets are already unfair, we should make them even more unfair? Why have oversight of the markets if having them does not solve the problem? It is analogous to saying: why have a police force since crime still happens? Your argument does not hold ground. Insider trading should be illegal. Financial markets should be transparent and fair.

Jan 16, 2018 - 2:58pm

andres17:
"I think he's wrong! The reality is financial markets aren't fair, information asymmetry and privileges exist to varying degrees."

So your argument is that since the markets are already unfair, we should make them even more unfair? Why have oversight of the markets if having them does not solve the problem? It is analogous to saying: why have a police force since crime still happens? Your argument does not hold ground. Insider trading should be illegal. Financial markets should be transparent and fair.

Government should definitely prosecute fraud and any instances of cheating stakeholders. Who is cheated by insider trading?

  • 1
Jan 16, 2018 - 2:56pm

Insider trading as an offence really came together in the 1980s as a means for certain famous NYC politicians to make a career (it worked). In fact, to a certain extent the current crop of attacks is the same thing, politicians trying to surf a populist wave.

Markets were perfectly fine without insider trading litigation before then. Livermore recalls observing the trading of insiders to get insights on the true performance of a stock. Crowds were still comfortable with jumping into markets, there was no "confidence" issue.

A good but controversial read is "Payback" by Fischel. Although the author is clearly biased, he does make good points, like the reasons behind the energy with which Milken was prosecuted, and the fact that the few counts they could find against him had never been prosecuted before nor were they used ever again. Milken was one of the most prodigious bankers of the 20th century, single-handedly creating a market for non-blue chip stocks, and it's worth noting that the companies he had selected, insider or not, had much lower default rates than their credit rating implied. Fischel argues quite successfully that insiders make markets adapt to prices much faster, especially on the downside.

  • 3
Jan 16, 2018 - 2:59pm

Behavioral finance studies show that as insider trading goes up, volume goes down, and as a result, liquidity decreases.

In other words, allowing insider trading is inconsistent with reality. If every potential counterparty was doing it, nobody would trade.

If insider trading became legal, I would sell all of my financial assets and just hold gold and enough cash for working capital. Maybe I would buy real estate if it was still illegal to sell a house that you know is infested by termites.

Jan 16, 2018 - 3:00pm

IlliniProgrammer:
Behavioral finance studies show that as insider trading goes up, volume goes down, and as a result, liquidity decreases.

In other words, allowing insider trading is inconsistent with reality. If every potential counterparty was doing it, nobody would trade.

If insider trading became legal, I would sell all of my financial assets and just hold gold and enough cash for working capital. Maybe I would buy real estate if it was still illegal to sell a house that you know is infested by termites.

In rare form, I fully agree here!

Jan 16, 2018 - 3:03pm

If it was legalized I'd take all my monies, put em in a money market fund and enjoy the returns while trying to get a CFO job at some company where I can then insider trade.

"I did it for me...I liked it...I was good at it. And I was really... I was alive."
Jan 16, 2018 - 3:10pm

SanityCheck:
^Andres17 bro...learn to quote.

I am sorry dude. I was just trying to reply to the whole thread. I guess it confused some people. The reply from
eokpar02 was meant for me.

Jan 16, 2018 - 3:08pm

Good lord, WSO intelligent level went from ape to Reddit. Anyways for whoever thinks insider trading is fine, just think about it in terms to sports gambling and match fixes. Same analogy, a privileged few who are in the loops wins, and while others don't want to play anymore because they realize they are the suckers.

Jan 16, 2018 - 3:09pm

ladubs111:
Good lord, WSO intelligent level went from ape to Reddit. Anyways for whoever thinks insider trading is fine, just think about it in terms to sports gambling and match fixes. Same analogy, a privileged few who are in the loops wins, and while others don't want to play anymore because they realize they are the suckers.

Are you retarded? When someone fixes a sporting event, they influence the actions of one of the parties to LOSE. When someone, uses insider information to trade, they don't influence the underlying asset even in the slightest way. Paying a boxer to fall and pretend to be knocked out is much different from knowing that the boxer is sick and will likely be knocked out.

Also, that should only be a CIVIL matter. If you influence a sporting event so that one person loses, my beef is with the other gamblers; it isn't with the government. Voluntary interactions would snuff this "problem" out in a second.

Fuck you and your remarks about supposed intelligence levels. I can't stand bad logic.

I am not cocky, I am confident, and when you tell me I am the best it is a compliment. -Styles P
  • 2
  • 1
Jan 16, 2018 - 3:37pm

IlliniProgrammer:
Yeah. Insider trading is not illegal in the commodities market, but (1) the impact of any insider information is much weaker although (2) I would argue it still causes harm on some level.

Nobody knows what corn production will be next year. People do know that a company will post a 50% earnings miss next month.

IP, your response is strange because you mention things that have no effect on insider trading cases. Being an insider is having information that the public isn't privy to. You just show your inherent dishonesty by adding a caveat.

Also, why do you keep mentioning corn? Commodities, futures, bonds, derivatives, etc. are all traded with insider information without fear of prosecution

I am not cocky, I am confident, and when you tell me I am the best it is a compliment. -Styles P
  • 1
Jan 16, 2018 - 3:49pm

With the exception of a few ad hominem arguments at my article, the comments response has been overwhelmingly great! I have seen a few heated debates going back-and-forth and getting a bit astray from the topic but this is the goal of my writing.

I would like to say that I did have to "chop" this post to make it more readable and so I left out some supporting content. However, I would at least like to share an article published by Stephen Bainbridge of UCLA School of Law simply titled, Insider Trading. While I haven't yet read it, I did skim though it a bit and he seemingly treats insider trading rather objectively, taking up both sides of the issue and I would suggest that everyone who commented here have a read…even myself!

Otherwise, thanks again for the great number of responses!

Who Am I? | See what GMngmt is all about at About.Me
  • 1
Jan 16, 2018 - 3:50pm

The best way to get a bunch of responses to your front page thread- and that "lots of comments" bonus from Patrick is to suggest something really obnoxious. I am not sure this really creates value for WSO:

"Apple will go bankrupt in two years"
"Stanford graduates should pursue careers in high seas piracy"
"My rant about dumb people saying stuff about the CFA"
"HBS students got rejected from Haas" (yes yes I am probably guilty of stuff like this, but my only OPs have been about personal finance)
"Insider trading should be legal!"

You know what created a lot of value for readers? Deepak Malhotra's video on negotiating salaries last week- what might have been a WSO exclusive.

I don't want to reduce readership, but I do want to see if we can figure out a way to have OPs pursue higher-quality articles. Maybe that means I am going to fast from posting in articles that make me angry, and instead post in articles that ask interesting question.

Jan 16, 2018 - 3:52pm

IlliniProgrammer:
The best way to get a bunch of responses to your front page thread- and that "lots of comments" bonus from Patrick is to suggest something really obnoxious. I am not sure this really creates value for WSO:

"Apple will go bankrupt in two years"
"Stanford graduates should pursue careers in high seas piracy"
"My rant about dumb people saying stuff about the CFA"
"HBS students got rejected from Haas" (yes yes I am probably guilty of stuff like this, but my only OPs have been about personal finance)
"Insider trading should be legal!"

You know what created a lot of value for readers? Deepak Malhotra's video on negotiating salaries last week- what might have been a WSO exclusive.

I don't want to reduce readership, but I do want to see if we can figure out a way to have OPs pursue higher-quality articles. Maybe that means I am going to fast from posting in articles that make me angry, and instead post in articles that ask interesting question.

Thanks for the advice and I'll try to incorporate that going forward!

Who Am I? | See what GMngmt is all about at About.Me
  • 2
Jan 16, 2018 - 3:53pm

Should Insider Trading Be Legal? (Originally Posted: 11/24/2010)

In the midst of the FBI's insider trading crackdown, Stockpickr founder and Tim Burton lookalike James Altucher has posed an interesting question; should insider trading even be illegal?

He argues that it shouldn't, citing among other things, "If some players in a market have an advantage, then some have a disadvantage and that's not fair."

He however isn't sure if it will come out black and white, but stated the benefits of legalization:

• The more information in a market, any market, the more efficient prices become. If informed investors start buying or selling based on privileged information, asset prices will rise to their "correct" level. For instance, in the Hilton case, we probably would have seen a smooth progression of the stock price from 33 to 45 over the prior month as talks progressed, instead of the spike in just one day.

• Fraud will be exposed earlier. This is a very key point to the argument. Enron is an example where tens of thousands of investors got burned because they were piling into the stocks during the later stages of its fraud. If insiders were selling we would've seen a much swifter move down, and probable fraud exposed.

• Companies will either become more transparent, to keep the retail investor happy, or will themselves enforce secrecy rather than being complacent with the idea that the law somehow protects their secrets.

• One concern is that there will be a flight of liquidity because people will be concerned about the legitimacy of our markets. Rather, the opposite will occur. More enforcement dollars will be used to uncover actual frauds such as the next Enron or Worldcom. Arguably, these frauds are a thousand times more dangerous for the retail investor than what is probably a victimless crime such as insider trading.

• Insider trading is almost impossible to prosecute and the government wastes countless dollars trying.

While I see his points, the fact of the matter is there are just as many loopholes to this than what we have going on today and in my opinion this could drive moneyrunners to even darker territories in search for that ever elusive "edge".

What do you guys think? How will this work and how will it not?

The big if here is the level of transparency the banks and the corporations are willing to give, if there's any wiggle room at all then what's to stop a Ken Lay or a Boesky from capitalizing on it?

Curious on what you guys have to say here.

People like Coldplay and voted for the Nazis, you can't trust people Jeremy
  • 2
  • Anonymous Monkey's picture
  • Anonymous Monkey
  • Rank: Chimp
Jan 16, 2018 - 3:55pm

No. People are always going to have advantages and disadvantages, but we have to draw the line somewhere and insider trading equates to high level executives screwing over the individual investors right before the stock tanks.

Jan 16, 2018 - 3:56pm

You'd still see stock spikes and sell-offs. The difference will be that as soon as you see the CEO dump some shares, everyone will go running for the hills. The opposite will happen if he/she buys shares. So, instead of tying stock movements to the news, they will be further driven by speculation.

Making "standard" investments would no longer be the best way to allocate money and everyone would seek an edge. Would be a disaster.

CompBanker

  • 2
Jan 16, 2018 - 3:58pm

Great link econ, thanks.

People like Coldplay and voted for the Nazis, you can't trust people Jeremy
Jan 16, 2018 - 3:59pm

im currently reading a book for school called "devil take the hindmost"

It explains the phenomenon of speculation and goes back in history to give examples of how it all began. In the late 1800s many people speculated in stocks, but never was it considered "investing." Insider trading was rampant and not prosecuted. I think if insider trading was made legal we would see a change like what happened in the 1800's. People would only put money in stocks to speculate based on information they have that others don't possess, and "investing" for the long-term would be history.

Jan 16, 2018 - 4:03pm
pittpanthers123:

It explains the phenom I think if insider trading was made legal we would see a change like what happened in the 1800's. People would only put money in stocks to speculate based on information they have that others don't possess, and "investing" for the long-term would be history.

This is pretty much happening now. Who invests for the long term? Who really 'invests' in todays market?

Jan 16, 2018 - 4:00pm

I think the arguments against insider trading laws are very strong. But human nature being what it is, people will always feel a visceral reaction against something that seems blatantly unfair. So I'm not going to hold my breath.

Jan 16, 2018 - 4:01pm

The entire purpose of having having "public companies" is to eliminate or seriously reduce information risk and thus lower the cost of capital. If investors are looking at huge devaluations because someone inside is giving people outside information which they have not chosen to follow these practices, a large market of investors is lost and ultimately the cost of capital for the firm will rise. If you want to trade on inside information, stick to non-public securities. The entire purpose of an auditor is to reduce information asymmetry so maybe we should completely do away with audits? Wait you don't like that idea do you?

Jan 16, 2018 - 4:09pm
silentdud:
If you want to trade on inside information, stick to non-public securities. The entire purpose of an auditor is to reduce information asymmetry so maybe we should completely do away with audits? Wait you don't like that idea do you?

Not that this necessarily means anything, but I'm pretty sure some economists don't really think auditors solve the information asymmetry problem they're supposed to.

  • 1
Jan 16, 2018 - 4:04pm

Information asymmetry will always occur, and while allowing those with pre-knowledge to trade on something and make a dollar earlier than everyone else may seem unfair, the market isn't about fairness. The market is supposedly about efficient transfer of capital; all it really is, is another vehicle to make money. So knowing this, and given markets are indifferent to the reality of their purpose, then should it not be indifferent to the application of it's stated purpose, transfer of capital? Insider trading is the truest form of knowledgable, or informational symmetry capital transfer decision making. Fairness, equality, or right have nothing to do with capital, efficiency, or information symmetry.

None of that probably made sense, but o well.

-N.

"It's about the game." - Gordon Gekko "No matter how much money you make, you'll never be rich." - Jacob "Jake" Moore "'Oh Africa Brave Africa'. It was... a laugh riot." - Patrick Bateman
  • 1
Jan 16, 2018 - 4:06pm
PecuniaryTutelage:
Information asymmetry will always occur, and while allowing those with pre-knowledge to trade on something and make a dollar earlier than everyone else may seem unfair, the market isn't about fairness. The market is supposedly about efficient transfer of capital; all it really is, is another vehicle to make money. So knowing this, and given markets are indifferent to the reality of their purpose, then should it not be indifferent to the application of it's stated purpose, transfer of capital? Insider trading is the truest form of knowledgable, or informational symmetry capital transfer decision making. Fairness, equality, or right have nothing to do with capital, efficiency, or information symmetry.

None of that probably made sense, but o well.

-N.


There are loads of examples of markets falling apart over this issue with only one security exhibiting its characteristics. The man who won the nobel prize explained this using a "lemon car" example. I DARE you to play in a market that has this issue like Saudi Arabia, etc. If you don't know someone or something, its terrifying to do anything in those markets. You will get taken and you will NOT by the big bear you think you will. It will literally become the only thing you can trade on without demanding an absurd return.
Jan 16, 2018 - 4:05pm

Veritatis ullam voluptatem repellendus id. A autem dolore quia nihil molestias est voluptatum. Minus modi velit assumenda consequuntur similique rerum alias. Quod est aspernatur quia mollitia explicabo. Voluptatem porro similique tempore laborum molestias non ut.

Omnis labore rem sint neque consequatur optio. Et natus rerum eligendi ex sit dolor alias. Voluptas nisi qui ut qui. Aut cum est nihil. Sed eaque ut aut eum.

Qui dolores iure molestias molestiae consequatur culpa at. Est incidunt explicabo quaerat nihil dolorem cum. Assumenda molestiae nesciunt nulla. Ex hic et possimus in quasi.

Jan 16, 2018 - 4:07pm

Quia nihil quam dignissimos vitae et error sapiente aut. Optio maiores consequatur voluptatibus dolores rem voluptatibus unde consectetur. Omnis harum error nihil maxime asperiores consectetur. Culpa rerum ipsa eos rerum reiciendis ipsam sequi. Cupiditate illo voluptatem ut at ipsa odio autem at. Animi molestiae et id aut. Numquam quisquam rerum cupiditate sit alias doloremque tempora temporibus.

Enim mollitia rerum sunt velit. Dolor repellat omnis molestiae et. Est dolorem eos enim reiciendis.

Jan 16, 2018 - 4:10pm

Quia sed nesciunt molestias quisquam ea explicabo ut. Non et reiciendis commodi laboriosam perferendis quia numquam architecto. Magni consequatur consequuntur iure eligendi doloremque nobis cum aspernatur. Nam unde ut qui molestias magni qui molestiae. Nemo praesentium aut qui dolor.

Dicta similique debitis qui corporis repudiandae eum. Qui tenetur aut voluptas commodi et. Explicabo assumenda et exercitationem consectetur omnis. Id qui nemo facere minus pariatur. Similique voluptatem perspiciatis numquam consequuntur et veritatis consequuntur. Cupiditate esse quis et saepe facilis quibusdam.

"It's about the game." - Gordon Gekko "No matter how much money you make, you'll never be rich." - Jacob "Jake" Moore "'Oh Africa Brave Africa'. It was... a laugh riot." - Patrick Bateman
Jan 16, 2018 - 4:11pm

Consequatur corporis voluptas sit. Nam velit nam recusandae perferendis. Neque vel sit nostrum laborum accusamus est at aut. Dolor modi dolor modi voluptates distinctio numquam ratione. Neque molestiae facilis necessitatibus quas voluptas molestiae incidunt. Tempora harum esse rerum aut velit.

Minus similique perferendis dolore molestias. Debitis placeat ex nulla sed. Ipsum aut omnis quia iure rerum et eos. Id iste ducimus non quia. Tempore minus voluptatibus ut placeat quae.

Sequi aut ut rem sit perspiciatis fugiat sint. Quia porro nihil dolor atque dolores. Assumenda ducimus quaerat quos explicabo. Quae et quidem in ut corrupti.

"It's about the game." - Gordon Gekko "No matter how much money you make, you'll never be rich." - Jacob "Jake" Moore "'Oh Africa Brave Africa'. It was... a laugh riot." - Patrick Bateman
Sep 10, 2018 - 7:33pm

Id sit enim qui est ut iusto ipsa. A at explicabo et. Autem vel consequatur ad ea.

Praesentium fugit qui voluptatibus. Consequatur odio dolor voluptas omnis autem et velit. Voluptatem aperiam architecto laborum a. Omnis et neque ut voluptatum.

Rerum ut maiores magnam. Sunt molestiae harum ad quo earum cum voluptatum.

Neque facere ut quas cupiditate. Autem facilis aperiam quis deleniti expedita nostrum aliquid. Optio ipsa quis repellendus sunt velit magni quo.

Oct 19, 2018 - 3:28pm

Corrupti aut eius autem tempora reiciendis quia animi. Laudantium suscipit quas et quia nesciunt voluptas voluptatum. Qui magni distinctio ullam rerum voluptate sequi quis. Et omnis quo commodi sit rerum veniam vel. Atque in qui neque est est suscipit earum molestiae. Harum cumque voluptas laborum beatae rerum ut magnam.

Start Discussion

Total Avg Compensation

December 2021 Investment Banking

  • Director/MD (10) $853
  • Vice President (40) $360
  • Associates (236) $235
  • 2nd Year Analyst (145) $156
  • 3rd+ Year Analyst (34) $154
  • Intern/Summer Associate (107) $146
  • 1st Year Analyst (515) $136
  • Intern/Summer Analyst (396) $84