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Why Not Insider Trade on Every Company?

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Re: Why Not Insider Trade on Every Company?

#111

Post by tajen »

rodgerd wrote: post #95
amalcon wrote: post #64

Earlier quoted context omitted.

The main reason we don't like insider trading is that we like participation in the market by relative amateurs. A system that allows insider trading discourages participation by amateurs, because they do not have insider information. Insiders would earn money at the expense of these amateurs, so it's better for them to stick to other sorts of investments to avoid this "tax". This isn't necessarily a problem. As a soc…

> The main reason we don't like insider trading is that we like participation in the market by relative amateurs. A system that allows insider trading discourages participation by amateurs, because they do not have insider information. While I agree with that in theory, in practise we see that the rest of the market is so hopelessly skewed in favour of insiders in one form or another it's like a sticky plaster on the…

HFT: I've never understood why stock is traded on a continuous time. In NYC there's a famous crossroad where banks have IT offices, because they want to be as close as possible to the stock exchange's servers, because 50ms latency difference can make them earn a few millions per year. If stock were traded discretely, like every 3 minutes or so, we would allow bids to pile up, and HFT and closer banks wouldn't have an advantage over more remote clients.

Re: Why Not Insider Trade on Every Company?

#113

Post by mathgenius »

Taek wrote: post #29

Perhaps someone will change my mind, but I see the block on insider trading and spoofing as harmful to the financial industry overall. Someone starts shorting a ton of Apple stock? That probably means something big is happen at Apple, and it's not good. It's information. Spoofing as a technique can be used to combat and inhibit other types of trading, and is in some sense an algorithm to 'keep the opponent honest'. A…

Allowing insider trading could also lead to much more "herding" behaviour: if the market starts moving before the official news event, it probably means someone (a big player) knows something, so everyone else is going to get on board the move. Now add a second order effect to this: people (big players) will try gaming the system by starting a herd effect before the big news. Especially if you make the herd go in the wrong direction you are going to win big time.

All of this leads to exactly the opposite of what you are hoping for: price discovery. It's just chaos and instability, and probably harmful to the market in general.

Re: Why Not Insider Trade on Every Company?

#114

Post by mathgenius »

nostromo wrote: post #5

It's actually still possible to perform a specific type of legal insider trading. Example: you are an executive at E Corp and the company will announce its acquisition in two months. You had previously set up planned trades to sell x number of shares each month before then. Because the acquisition is at a premium on the current price, you will make much less money if you go forward with your trades before the announc…

It also seems that trading currencies is not prohibited by any "insider trading" rules. See: recent unpegging of the swiss franc from the euro. There was much shenanigans in the market before the franc was unpegged.

Re: Why Not Insider Trade on Every Company?

#115

Post by erikb »

cheez wrote: post #58

What blows my mind is that these people don't encrypt their emails with some form of plausible deniability envelope. I mean, if you're smart enough to set up servers for customers of your illegal activities, you should be smart enough to know what to avoid.

Not really, especially in East European countries where the legal system is weak. When everybody hacks everybody every day and nobody gets sued then you stop to worry about hiding.

Re: Why Not Insider Trade on Every Company?

#116

Post by erikb »

nostromo wrote: post #5

It's actually still possible to perform a specific type of legal insider trading. Example: you are an executive at E Corp and the company will announce its acquisition in two months. You had previously set up planned trades to sell x number of shares each month before then. Because the acquisition is at a premium on the current price, you will make much less money if you go forward with your trades before the announc…

There are probably hundred ways to do it legally. Would you be surprised to find out that for every company with such a business model that gets caught there are 10 or 100 or maybe 1000 that do the same thing but more smart and therefore with legal protection? Wouldn't shock me.

Re: Why Not Insider Trade on Every Company?

#117

Post by intended »

robotresearcher wrote: post #107
omalleyt wrote: post #105

Earlier quoted context omitted.

The share price likely wouldn't reflect insider knowledge. To see this, take an extreme example. The CEO owns less than 1% of most publicly traded companies. Even if he was allowed to sell his whole position without public disclosure, it wouldn't affect the stock price that much. Say he wakes up and finds out through insider knowledge that his company will go bankrupt tomorrow. He sells all his shares today. The stoc…

But assuming that public disclosure was required for insiders, the CEO selling all their stock could drive the price down pretty quickly. People will be watching that particular 1% closely.

This assumes really fast turn arounds on this information.

There's time taken to submit data to a central clearing house and time taken for them to publish it.

Many people may not want you to have a real time feed letting people know what shares they have just sold.

There also exist accounting cycles and hence corresponding disclosure cycles. CEOs can make non related entity trades, mask trades, etc. Seasoned financiers are far smarter than the new entrant. They will find ways to reduce their "downside", and increase their upside.

You always want to ensure that new entrants are not left to the mercy and warm fuzzy feeling of finance experts. The rule is that they can't afford them.

Re: Why Not Insider Trade on Every Company?

#118

Post by notahacker »

joe_the_user wrote: post #39
Taek wrote: post #29

Perhaps someone will change my mind, but I see the block on insider trading and spoofing as harmful to the financial industry overall. Someone starts shorting a ton of Apple stock? That probably means something big is happen at Apple, and it's not good. It's information. Spoofing as a technique can be used to combat and inhibit other types of trading, and is in some sense an algorithm to 'keep the opponent honest'. A…

The thing that I think neither you nor this article get is that insider trading bans are criminal penalties that merely supplement a person's civil employment contract. That is, nearly everyone who is given insider information as part of their condition of employment is implicitly or explicitly given it on the condition that they don't exploit it. I'm pretty radically against copyrights and such but I don't think any…

And apart from barring employees benefiting relative to other stockholders from additional information related to factors they don't directly influence, corporations also have to consider that executives wishing to actively influence stock movements to create insider trading opportunities will usually find it much easier to engineer an unanticipated dip in the share price than an unanticipated rise...

Insiders can create information as well as trade based on it, so there are very strong reasons for corporations to ensure they and their associates' potential gains from trade are very closely aligned with those of other market participants.

Re: Why Not Insider Trade on Every Company?

#119

Post by sokoloff »

peejaybee wrote: post #87
eitally wrote: post #80

Earlier quoted context omitted.

The thing that confounds the situation a bit, for a large quantity of people, is that in certain industries and in certain roles, a huge number of people are considered insiders. For example, anyone at a corporation who can access sales or booking data is an insider ... including the poor CRM administrator in IT or the exec admin in the Sales office. Beyond that, though, in financial services firms it's entirely poss…

A large swath of people where I worked a couple of jobs back were considered "covered portfolio persons" who had to pre-clear trades in all but a few classes of securities (basically open-ended mutual funds, and small trades in very large-cap equities) and report almost everything. We had to instruct any brokerage firms to send quarterly reports to our compliance department. I don't know if everybody was covered, but…

Working for D. E. Shaw and later Merrill, we had duplicate trade confirms cc'd to compliance for all trades in all accounts. I didn't have to pre-clear trades in general, though there was a process to do so for some employees and for employees with questions about whether a contemplated trade was OK.

Re: Why Not Insider Trade on Every Company?

#120

Post by MarcusVorenus »

amalcon wrote: post #64
Taek wrote: post #29

Perhaps someone will change my mind, but I see the block on insider trading and spoofing as harmful to the financial industry overall. Someone starts shorting a ton of Apple stock? That probably means something big is happen at Apple, and it's not good. It's information. Spoofing as a technique can be used to combat and inhibit other types of trading, and is in some sense an algorithm to 'keep the opponent honest'. A…

The main reason we don't like insider trading is that we like participation in the market by relative amateurs. A system that allows insider trading discourages participation by amateurs, because they do not have insider information. Insiders would earn money at the expense of these amateurs, so it's better for them to stick to other sorts of investments to avoid this "tax". This isn't necessarily a problem. As a soc…

> A system that allows insider trading discourages participation by amateurs

Not really, amateurs mostly make long term investments, they are not buying and selling based on quarterly reports. The only ones who would be affected by legal insider trading are the gamblers.

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