Making Insider Trading Legal • Hacker News Board

Re: Making Insider Trading Legal

#41

Post by JacobH » Sun, Nov 01, 2015, 6:01 PM UTC

bobcostas55 wrote: post #35

lambdapie wrote: post #21

Insider trading does harm people, and does reduce liquidity. Many people who understand classical economics get this wrong [0], because financial markets are a very degenerate kind of market from the point of view of classical economics. The fundamental error in all cases is to conceptualize insider trading as buying from someone who would have bought/sold anyway . This is precisely failing to think at the margin. It…

You completely ignore the benefit of the more accurate price. Let's say the price of a share with the inside info is 110. It is now 100. The inside trader does cause some volume that wouldn't have happened otherwise, and moves the price to 105 -- to the detriment of someone who would not have traded otherwise. But then every subsequent trade is at a price closer to the true one, a clear benefit. It is true that great…

Bad argument because you stated the problem. Insider trading is bad because of what you pretty much said. Liquidity is only important when considering how fast you want to buy or sell your stakes in a company.

If an insider knows a stock will yield him 10% profit and has a month of time to buy stocks, even if the daily volume is 500k shares. They can gradually buy shares at 20k/day, and once that news becomes public and the liquidy goes up they can sell off all of their shares in one shot pretty much. And people just just got news of the information would think that their stock has a 10% upside, but since someone already beat them to the 10%, they aren't going to get anything.

Re: Making Insider Trading Legal

#42

Post by Natanael_L » Sun, Nov 01, 2015, 6:06 PM UTC

bobcostas55 wrote: post #35

lambdapie wrote: post #21

Insider trading does harm people, and does reduce liquidity. Many people who understand classical economics get this wrong [0], because financial markets are a very degenerate kind of market from the point of view of classical economics. The fundamental error in all cases is to conceptualize insider trading as buying from someone who would have bought/sold anyway . This is precisely failing to think at the margin. It…

You completely ignore the benefit of the more accurate price. Let's say the price of a share with the inside info is 110. It is now 100. The inside trader does cause some volume that wouldn't have happened otherwise, and moves the price to 105 -- to the detriment of someone who would not have traded otherwise. But then every subsequent trade is at a price closer to the true one, a clear benefit. It is true that great…

But there's also bad incentives tied to it - with inside information, you're incentivized to keep others in the dark so that you can maximize the impact of your trades. Things like borrowing money to short stocks in a company likely to go bankrupt, while telling people to buy.

Re: Making Insider Trading Legal

#43

Post by newjersey » Sun, Nov 01, 2015, 6:06 PM UTC

maxerickson wrote: post #17

Dylan16807 wrote: post #14

Earlier quoted context omitted.

Are you saying that "nonpublic" by itself implies that I got the information from an insider? If someone else deduces the same information, does my copy stop being nonpublic? Or was I mistaken in thinking it was nonpublic at all, since someone could deduce the same information? If I'm watching a company's delivery road from across the street, is all that info public even though it's only available to me and five othe…

Yes. I'm not a lawyer and all that, but counting trucks on the street wouldn't be nonpublic information, even if it is more available to some group of outside people. I think it is also clearly the case that concrete insider knowledge will be considered differently than deductions. This goes on and on about the meaning of the term: http://www.investopedia.com/exam-guide/cfa-level-1/ethics-st...

OK, lets get the camel's nose inside the tent. Imagine I am a janitor who works at Acme Inc. I notice that the board meets every Tuesday at 2:00 PM and they always laugh and seem to have fun. I can't hear anything behind the glass doors but it seems that they are all merry. Now, fast forward some time and I see that the meetings are not merry any more. It looks like there is a lot of yelling and banging on the conference room table all around. They all come out from the board room calm and composed though. As usual, I can't hear anything.

Now, I pass on this information to someone. They short the stock based on this information alone. Have I or the person I talked to broken insider trading rules? I'd say no.

Re: Making Insider Trading Legal

#44

Post by evanpw » Sun, Nov 01, 2015, 6:06 PM UTC

lambdapie wrote: post #21

Insider trading does harm people, and does reduce liquidity. Many people who understand classical economics get this wrong [0], because financial markets are a very degenerate kind of market from the point of view of classical economics. The fundamental error in all cases is to conceptualize insider trading as buying from someone who would have bought/sold anyway . This is precisely failing to think at the margin. It…

I basically agree with this, but I don't think it helps that much to answer the question of which trading activities should be allowed, and which should send you to prison. Almost all of what you've said applies equally well if you replace "insider trading" with "professional trading".

If you send a 1000 share buy order to the market, knowing that you're going to send 99 more of them throughout the day, you're making money (or at least losing less money) because of information that you have and your counterparties don't. And that kind of trading definitely has a negative effect on liquidity (almost the whole difficulty in market making is preferentially trading against people who aren't doing this). But this splitting of orders is universally viewed as "ok", and is how most large-volume trading is done these days.

The difference between this and insider trading is in who owns the information. Most people view the large-volume trader as doing something okay, because they own the information about their own future trading behavior. Insider trading is illegal not because it's unfair to trade on asymmetric information, but because you're trading on information that was stolen from the company. (This is why Mark Cuban didn't go to prison: a company gave him some insider information, but forgot to ask him not to trade on it; no stealing involved).

From this perspective, it makes sense to prosecute the original tipper, and anyone in the chain who knew (or should have known) that the information was stolen (by analogy to the crime of passing stolen goods), but not the guys at the end who were clueless about the scheme. (Although it might make sense to make them disgorge their trading profits.)

Re: Making Insider Trading Legal

#45

Post by lumberjack » Sun, Nov 01, 2015, 6:10 PM UTC

mstade wrote: post #20

> Many people on Wall Street felt that Bharara’s crusade against insider trading was recklessly broad: An analyst like Horvath might knowingly obtain an illegal tip, but if he feeds his information up the chain to a Steinberg or a Cohen, and they take his word that he is not passing along stolen goods, should they really go to prison for that misplaced faith? Is it fair to convict someone of engaging in insider tradi…

But realistically if somebody tells me to buy or short X, I won't do that without asking why. How is it possible that the person does not realize they are being handed insider information?

Re: Making Insider Trading Legal

#46

Post by monochromatic » Sun, Nov 01, 2015, 6:11 PM UTC

runn1ng wrote: post #24

Not related to the actual article, but I got stuck on the word "coöperating". Originally, I thought the "Umlaut" is a typo or a mistake, but, according to wiktionary, "coöperate" is an actual word! I still feel like pronouncing the second "ö" like in German though.

It's just the New Yorker being pedantic. It's a fight I sometimes agree with, but there's no way "coöperating" is ever going to become standard--it's always going to look weird to the vast majority of readers.

Re: Making Insider Trading Legal

#47

Post by baobabaobab » Sun, Nov 01, 2015, 6:12 PM UTC

praptak wrote: post #38

mstade wrote: post #20

> Many people on Wall Street felt that Bharara’s crusade against insider trading was recklessly broad: An analyst like Horvath might knowingly obtain an illegal tip, but if he feeds his information up the chain to a Steinberg or a Cohen, and they take his word that he is not passing along stolen goods, should they really go to prison for that misplaced faith? Is it fair to convict someone of engaging in insider tradi…

Stolen phone doesn't look different from a legit one, you need to actively verify its record. I doubt an insider tip can be honestly mistaken for a legit one. Which makes the plausible deniability even weaker.

You might have a tip about a merger because a PI is watching a corporate parking lot. Just because something is a secret, doesn't mean an insider leak is the only way for it to be known.

Re: Making Insider Trading Legal

#48

Post by maxerickson » Sun, Nov 01, 2015, 6:14 PM UTC

newjersey wrote: post #43

maxerickson wrote: post #17

Earlier quoted context omitted.

Yes. I'm not a lawyer and all that, but counting trucks on the street wouldn't be nonpublic information, even if it is more available to some group of outside people. I think it is also clearly the case that concrete insider knowledge will be considered differently than deductions. This goes on and on about the meaning of the term: http://www.investopedia.com/exam-guide/cfa-level-1/ethics-st...

OK, lets get the camel's nose inside the tent. Imagine I am a janitor who works at Acme Inc. I notice that the board meets every Tuesday at 2:00 PM and they always laugh and seem to have fun. I can't hear anything behind the glass doors but it seems that they are all merry. Now, fast forward some time and I see that the meetings are not merry any more. It looks like there is a lot of yelling and banging on the confer…

I don't think I have an interesting opinion about whether it is insider trading (meaning I don't think I could predict the legal outcome).

I think it would be loudly argued that the person receiving the information was aware of why it was valuable.

Re: Making Insider Trading Legal

#49

Post by lumberjack » Sun, Nov 01, 2015, 6:15 PM UTC

lambdapie wrote: post #21

Insider trading does harm people, and does reduce liquidity. Many people who understand classical economics get this wrong [0], because financial markets are a very degenerate kind of market from the point of view of classical economics. The fundamental error in all cases is to conceptualize insider trading as buying from someone who would have bought/sold anyway . This is precisely failing to think at the margin. It…

It also gives people in the C-suite perverse incentives especially at large publicly traded corporations, as if they do not already push for short term gains as much as possible.

Re: Making Insider Trading Legal

#50

Post by sneak » Sun, Nov 01, 2015, 6:18 PM UTC

mstade wrote: post #20

> Many people on Wall Street felt that Bharara’s crusade against insider trading was recklessly broad: An analyst like Horvath might knowingly obtain an illegal tip, but if he feeds his information up the chain to a Steinberg or a Cohen, and they take his word that he is not passing along stolen goods, should they really go to prison for that misplaced faith? Is it fair to convict someone of engaging in insider tradi…

Information isn't property, and erroneously applying property law to it has obviously disastrous consequences.