Hiring sociopaths only motivated by money to run your corporation is like training an AI. They'll constantly find novel ways to achieve their goals without meeting yours.
There's nothing evil in inside trading. It's a shame that it's against the rules in most markets. It only benefits some parties that aren't really invested into the company.
I've been thinking about it sometimes and this seems correct. Abolish this law and delay every single selling. Of course I haven't think this through and this may end catastrophically but I'd like to see a simulation.
This also ignores the large number of people with insider information who are not execs at the company. Clients, partnering firms, etc. If it's all about fiduciary duty, then the law firm doing a large M+A deal should mismanage that deal, so they can trade on it for their own profit.
The problem is that you’re moving from a simple easily-proven fact to something which requires two judgement calls. Any prosecutor can show that you made a trade before certain information became public, but proving that something was mismanagement (as opposed to a mistake or bad luck) or that it was a deliberate attempt to play share price games is so much harder that most executives would evade punishment even if pretty much everyone would find their actions hard to explain otherwise. White collar crimes are already enforced laxly due to the challenge of needing to prove intent in many cases, there’s no benefit to making it even easier to defraud investors.
You know the stock will go up, the other party unfairly doesn't. The other party would not have sold if he had known, so you have cheated the other party.
Same if you know the stock will go down. The other party would not buy if he had known the thing you unfairly do. This is also cheating someone.
Buying a rivals stock depends on the reason why, but it would be against company interest. The SEC doesn't need to enforce this, the board should fire him for it.
Public markets are intentionally set up to "benefits some parties that aren't really invested into the company" -- e.g. your retirement savings and your grandma's. That's a feature. Not a bug. Indeed, the main point of regulated public markets (as opposed to private ones) is to insulate your grandma's retirement funds from shenanigans like this, because before that, people would lose life savings to scammers.
If you want to allow shenanigans and / or only people with a vested interest, stay private and buy / sell only to savvy investors. That's allowed too.
Insider trading means insiders can and will:
1) Buy stock and launch (dishonest) positive press releases
2) Sell stock thereafter and launch (dishonest) negative press releases
Loop, rinse, and repeat. That happened, and if permitted, that would happen again. Much worse things happened too.
Your grandma can't do due diligence on every stock in her index fund. A savvy investor making targeted investments can.
Insider trading being illegal encourages participation in markets for people outside the company. As well as discourages intentionally messing up within the company and profiting from short selling
The argument against it is that markets would be more efficient if people were allowed to trade on information not yet available to the public
>>As well as discourages intentionally messing up within the company and profiting from short selling
While I do not agree with the OP on insider trading being good.... I also think short selling is a net negative and should be banned right along side insider trading
> I also think short selling is a net negative and should be banned
Why? The potential losses for shorting are infinite whereas the profit is capped, so entering a short requires high conviction. Stock markets are also a market for information: banning short selling takes away a large amount of information and has negative impacts on price discovery, liquidity etc.
That sounds about right. It is hard to make all information public asap (with all the regulation), so I would assume it would be hard to get rid of the wiggle room between when an insider can place a bet and the information actually becomes public
Matt Levine's most recent article touches on insider trading pros and cons (in relation to sports betting) and is, as usual, a great read - https://archive.is/jJ25g
It's not a question of morals, but a fundamental requirement for the publicly traded stock market to function.
If insider trading is allowed, the market will turn into a game called 'who has the best insider information'. No one will buy or sell stocks based on public information alone, because they will always be at a disadvantage.
If you’re buying stocks based on public information alone, in this age of web scraping and algorithmic trading, you’re already always at a disadvantage.
There's always the devil's advocate case that insider trading is good because it makes for more accurate price discovery (as in executives have access to non public information, so e.g. if the company has had a great quarter and the executives buy shares before the earnings figures are released then the price goes up and the market price more accurately reflects the value of the shares).
Of course this case is total nonsense but it is fun to make at parties (if you're weird like me) or something. In reality the market being fair is super important for it to function because people won't invest if they're continually being fleeced by people using inside information.
In the US insider trading laws are not based on fairness. They are based on theft, insiders using material non-public information are stealing from other shareholders.
There is no expectation of fairness in US public markets.
Theft is unfair? I mean fairness in "no market participants have access to information that is not public". Using a satellite to work out the usage rates of a real estate company's car parking centres? Fine. Bribing an executive to give you non public information? Unfair.
Insider trading is not unlawful because it is theft. It is considered theft because it is unlawful.
Trading with someone when you have knowledge they don't is not "theft" in the general sense of the word. If it was, there wouldn't need to be insider trading laws, because theft is already a crime. The only thing you have really taken from your trading counterparty is the expectation of additional profit (or reduced loss) had both parties traded only on public information. That is an expectation that is created by insider trading laws.
"Fairness" is a vague term. There is an expectation of fairness in US public markets in the limited sense that it is expected that traders generally have access to the same material information about the underlying security.
> Trading with someone when you have knowledge they don't is not "theft" in the general sense of the word.
It’s not theft, it’s fraud which is also illegal.
If I sell you a gold necklace I know is fake and worthless, that’s fraud.
If I run an antique appraisal business and you bring me an antique to value for you, I know it’s priceless but tell you it’s a knockoff and buy it from you for pennies on the dollar, that’s fraud.
Your examples are not what the PP was talking about.
If I know some information you do not and I make a trade with you based on that information to my gain, that is not fraud. There are rules that could put me in the "insider trading" target, but there are plenty of situations that don't. I might have done better market research than you did and know that some commodity is about to jump in value or some company is about to become more valuable due to some other activity in the world. Me trading on that information is not fraud, it's smart investing.
You examples are fraud and maybe (?) fraud. I'm not a lawyer so I couldn't say if lying to someone selling you something about it's value is fraud or not. Morally it's wrong, sure. Legally, I have no idea. Both of your examples are, IMO, bad.
>If I know some information you do not and I make a trade with you based on that information to my gain, that is not fraud.
It quite literally is fraud, whether you want it to be or not. If you KNOW a stock is worth more or less based on information that you currently have but are withholding from me in a trade, that's fundamentally fraud. If you know a stock is worth more or less based on publicly available information that I'm just too lazy to look up, it isn't.
I find it fascinating the gyrations folks in the financial sector go through to commit what are otherwise cut and dried illegal activities but pretend it's ok "because finance is complicated" or unique or some other such nonsense.
> If you KNOW a stock is worth more or less based on information that you currently have but are withholding from me in a trade, that's fundamentally fraud.
No, it's not. When A buys stocks from B based on knowlegde that A has, A is under no obligation to find out whether B has that knowledge as well and has understood what that knowledge entails to the same degree as A does.
Buying stocks based on non-public or not-yet-publicly-dissiminated knowledge is mostly perfectly legal. Only when such knowledge has been acquired by being an insider to the company, or through personal relations with insiders from that company, does one run into insider trading laws.
>Buying stocks based on non-public or not-yet-publicly-dissiminated knowledge is mostly perfectly legal. Only when such knowledge has been acquired by being an insider to the company, or through personal relations with insiders from that company, does one run into insider trading laws.
You're still literally describing fraud "in the general sense of the word" which is what this is all about. Again, the mental gyrations of trying to change the fundamental meaning of what you're doing "because finance" is silly and annoying.
The only justification anyone can rationally give for why insider trading exists as it does today, is because it's a loophole for lawmakers. It is nearly impossible for you as a private individual to have access to information that will significantly affect a company's stock price without either being an insider to that company, or a lawmaker that knows a law is going to go into effect that the public doesn't know about.
Either way, you making a deal on information that significantly affects the value of an asset without disclosing it to the buyer or seller is fraud, by definition. We aren't talking legally what is or isn't OK, we're talking about what fraud is.
"In law, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right."
Not sharing information is not deception.
FWIW, I'm in no way in the financial markets and have no personal stake in this conversation other that a dislike for incorrect assertions.
Your premise that it's fraud if I don't tell you every iota of information I have as it relates to some trade is, as a non-lawyer, very wrong. I'm unsure of what moral right you expect you have that would even make that assertion correct.
“it is expected that traders generally have access to the same material information”
This is absolutely incorrect. Whole industries exist to generate information advantages for trading. It’s perfect legal and encouraged for price discovery and market efficiency reasons.
It becomes illegal when I have an obligation to the other counterparties in the trade.
> This is absolutely incorrect. Whole industries exist to generate information advantages for trading. It’s perfect legal and encouraged for price discovery and market efficiency reasons.
Of course one party in the trade may actually have more information than the other. But the point is that they are both trading on the basis of public information. The industries you mention are involved in harvesting and analysing that public information, not selling inside information.
> It becomes illegal when I have an obligation to the other counterparties in the trade.
Again, I think you have it backwards: you have an obligation to the other counterparties (not to trade on inside information) because we have decided that insider trading should be illegal.
The only argument that holds water is that `in theory` anyone could generate the same information from what is publicly available, from first principles.
It might be expensive to do so, but they could do it.
Insider trading is slightly unique is that an outsider could not generate the same information as would be available to an insider. Their unique position is that the organisation they are part of is `inventing` information 'from thin air' (so to speak) on the basis of the decisions they are making.
> First, his employer, Medivation, had a policy that forbade trading other companies’ shares when employees had material nonpublic information about Medivation
Note: many financial crimes rely on the government finding your employer agreement that limits you
The SEC would have had no case even in their wildest stretch, if the employer didn’t have this policy
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[ 3.1 ms ] story [ 128 ms ] threadThis also ignores the large number of people with insider information who are not execs at the company. Clients, partnering firms, etc. If it's all about fiduciary duty, then the law firm doing a large M+A deal should mismanage that deal, so they can trade on it for their own profit.
You know the stock will go up, the other party unfairly doesn't. The other party would not have sold if he had known, so you have cheated the other party.
Same if you know the stock will go down. The other party would not buy if he had known the thing you unfairly do. This is also cheating someone.
Buying a rivals stock depends on the reason why, but it would be against company interest. The SEC doesn't need to enforce this, the board should fire him for it.
If you want to allow shenanigans and / or only people with a vested interest, stay private and buy / sell only to savvy investors. That's allowed too.
Insider trading means insiders can and will:
1) Buy stock and launch (dishonest) positive press releases
2) Sell stock thereafter and launch (dishonest) negative press releases
Loop, rinse, and repeat. That happened, and if permitted, that would happen again. Much worse things happened too.
Your grandma can't do due diligence on every stock in her index fund. A savvy investor making targeted investments can.
The argument against it is that markets would be more efficient if people were allowed to trade on information not yet available to the public
Seems like a worthy tradeoff to me
While I do not agree with the OP on insider trading being good.... I also think short selling is a net negative and should be banned right along side insider trading
Why? The potential losses for shorting are infinite whereas the profit is capped, so entering a short requires high conviction. Stock markets are also a market for information: banning short selling takes away a large amount of information and has negative impacts on price discovery, liquidity etc.
If you think a stock is underpriced, you can buy it and bet your knowledge is superior to the general market’s.
Shorting is just the logical reverse, and aids price discovery in the opposite direction.
How would you incentivize people to find fraudulent companies like Enron?
If that is true, then markets would be even more efficient is such information was made public immediately.
Matt Levine's most recent article touches on insider trading pros and cons (in relation to sports betting) and is, as usual, a great read - https://archive.is/jJ25g
If insider trading is allowed, the market will turn into a game called 'who has the best insider information'. No one will buy or sell stocks based on public information alone, because they will always be at a disadvantage.
Whoever's on the other side of the trade is by definition invested into the company, either before the sale, after the sale, or both.
Of course this case is total nonsense but it is fun to make at parties (if you're weird like me) or something. In reality the market being fair is super important for it to function because people won't invest if they're continually being fleeced by people using inside information.
There is no expectation of fairness in US public markets.
Trading with someone when you have knowledge they don't is not "theft" in the general sense of the word. If it was, there wouldn't need to be insider trading laws, because theft is already a crime. The only thing you have really taken from your trading counterparty is the expectation of additional profit (or reduced loss) had both parties traded only on public information. That is an expectation that is created by insider trading laws.
"Fairness" is a vague term. There is an expectation of fairness in US public markets in the limited sense that it is expected that traders generally have access to the same material information about the underlying security.
It’s not theft, it’s fraud which is also illegal.
If I sell you a gold necklace I know is fake and worthless, that’s fraud.
If I run an antique appraisal business and you bring me an antique to value for you, I know it’s priceless but tell you it’s a knockoff and buy it from you for pennies on the dollar, that’s fraud.
If I know some information you do not and I make a trade with you based on that information to my gain, that is not fraud. There are rules that could put me in the "insider trading" target, but there are plenty of situations that don't. I might have done better market research than you did and know that some commodity is about to jump in value or some company is about to become more valuable due to some other activity in the world. Me trading on that information is not fraud, it's smart investing.
You examples are fraud and maybe (?) fraud. I'm not a lawyer so I couldn't say if lying to someone selling you something about it's value is fraud or not. Morally it's wrong, sure. Legally, I have no idea. Both of your examples are, IMO, bad.
It quite literally is fraud, whether you want it to be or not. If you KNOW a stock is worth more or less based on information that you currently have but are withholding from me in a trade, that's fundamentally fraud. If you know a stock is worth more or less based on publicly available information that I'm just too lazy to look up, it isn't.
I find it fascinating the gyrations folks in the financial sector go through to commit what are otherwise cut and dried illegal activities but pretend it's ok "because finance is complicated" or unique or some other such nonsense.
No, it's not. When A buys stocks from B based on knowlegde that A has, A is under no obligation to find out whether B has that knowledge as well and has understood what that knowledge entails to the same degree as A does.
Buying stocks based on non-public or not-yet-publicly-dissiminated knowledge is mostly perfectly legal. Only when such knowledge has been acquired by being an insider to the company, or through personal relations with insiders from that company, does one run into insider trading laws.
You're still literally describing fraud "in the general sense of the word" which is what this is all about. Again, the mental gyrations of trying to change the fundamental meaning of what you're doing "because finance" is silly and annoying.
The only justification anyone can rationally give for why insider trading exists as it does today, is because it's a loophole for lawmakers. It is nearly impossible for you as a private individual to have access to information that will significantly affect a company's stock price without either being an insider to that company, or a lawmaker that knows a law is going to go into effect that the public doesn't know about.
Either way, you making a deal on information that significantly affects the value of an asset without disclosing it to the buyer or seller is fraud, by definition. We aren't talking legally what is or isn't OK, we're talking about what fraud is.
"In law, fraud is intentional deception to secure unfair or unlawful gain, or to deprive a victim of a legal right."
Not sharing information is not deception.
FWIW, I'm in no way in the financial markets and have no personal stake in this conversation other that a dislike for incorrect assertions.
Your premise that it's fraud if I don't tell you every iota of information I have as it relates to some trade is, as a non-lawyer, very wrong. I'm unsure of what moral right you expect you have that would even make that assertion correct.
This is absolutely incorrect. Whole industries exist to generate information advantages for trading. It’s perfect legal and encouraged for price discovery and market efficiency reasons.
It becomes illegal when I have an obligation to the other counterparties in the trade.
Of course one party in the trade may actually have more information than the other. But the point is that they are both trading on the basis of public information. The industries you mention are involved in harvesting and analysing that public information, not selling inside information.
> It becomes illegal when I have an obligation to the other counterparties in the trade.
Again, I think you have it backwards: you have an obligation to the other counterparties (not to trade on inside information) because we have decided that insider trading should be illegal.
It might be expensive to do so, but they could do it.
Insider trading is slightly unique is that an outsider could not generate the same information as would be available to an insider. Their unique position is that the organisation they are part of is `inventing` information 'from thin air' (so to speak) on the basis of the decisions they are making.
Really? What an idiot.
Note: many financial crimes rely on the government finding your employer agreement that limits you
The SEC would have had no case even in their wildest stretch, if the employer didn’t have this policy
Many financial crimes are contingent on this
In and of itself? Sure.
Can it differentiate between crime and not-crime for certain otherwise similar behavior patterns? Absolutely.
That's a technical detail. What he did was clearly wrong.