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Making Insider Trading Legal

newyorker.com

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Re: Making Insider Trading Legal

#61

Post by joe_the_user »

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…

It seems like some constituency likes the idea of legalizing insider trading so much that they grasp at a variety of straws in an effort to find some analogous place where it would be legal.

But these are very thin reeds.

"Suppose I have a business where I get stuff to sell on a 'don't ask, don't tell basis', that would be totally legal and no one would complain..." sure

"It's just information, information shouldn't be property"

--> Any employer has information they want private. If someone there was no overt law against spilling out one's employer's private information, it would certainly be a condition of employment. And intentionally doing anything that is - against your condition of employment and costs your employer millions of dollars, is going to wind in serious civil trouble. That state has decided to make this criminal also is entirely logical.

If a shop foreman takes money to shut down a factory for a day to benefit a revival, he would be guilty of theft without "shutting down a factory" being an otherwise criminal activity.

The fundamental thing is taking money from someone, which insider trading certainly does. Those who buy a stock on an insider get money - meaning those who sold the stock lose it.

Re: Making Insider Trading Legal

#62

Post by kpil »

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'd say it is considered inside information if you convey any notion of how the business goes to a select (closed) group of people, and it will be illegal of them to act on that information.

Is it illegal for you to act on that information? I should think so, but it will be hard to prove unless you do a unreasonably large trade.

Re: Making Insider Trading Legal

#63

Post by Natanael_L »

JacobH wrote: post #58
Natanael_L wrote: post #42

Earlier quoted context omitted.

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.

Telling people to buy stock you shorted is a bad idea. You're goal is for the stock to go lower.

> bankrupt

Should deal with that

Re: Making Insider Trading Legal

#64

Post by lambdapie »

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…

I wouldn't say that I ignored the benefit or a more accurate price, since I explicitly mentioned this benefit twice. But I wasn't clear enough of the implications. To clarify: insider trading has both benefits and costs, and there is no simple argument that shows which is greater. I was primarily addressing people (like in the article I referenced) who say that insider trading is clearly and unambiguously good.

Re: Making Insider Trading Legal

#65

Post by dang »

kawera wrote: post #18
Dylan16807 wrote: post #5

Earlier quoted context omitted.

I'm sorry you didn't get upvotes out of randomness or timing but it doesn't help to link a previous submission with no comments.

Thanks but I'm not looking for upvotes, I just wanted to signal that the dupe detector isn't working very well since it's the same title and url and have been posted only hours before this.

Please see the FAQ. It doesn't count as a duplicate until the story has had significant attention on HN. If we didn't have this rule, many good stories would go unnoticed because there's so much randomness in what gets liftoff from /newest.

https://news.ycombinator.com/newsfaq.html

Edit: One side-effect of our recent experiments in resuscitating solid articles is that it increases the number of reposts in the story stream. Given the number of comments we've seen about that, it seems users don't like this, so we've begun working on an alternative approach.

Re: Making Insider Trading Legal

#66

Post by Natanael_L »

baddox wrote: post #56
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 think the main trouble I'm having with your argument is the idea of it "harming" someone. While that seems to perhaps be true in the most technical sense, I'm not sure it's a sufficient argument for banning insider trading. After all, many things which harm people are not generally considered to be bad. For instance, if someone opens a restaurant Ina town, and runs the restaurant very efficient while offering a hig…

Should judges be able to trade on the information about companies be is about to deliver judgements for? Should city planners be allowed to trade on the information on approvals / denials before they're announced?

Re: Making Insider Trading Legal

#67

Post by Natanael_L »

baddox wrote: post #57
evanpw wrote: post #53

Earlier quoted context omitted.

> with inside information, you're incentivized to keep others in the dark so that you can maximize the impact of your trades This is true of all professional trading. > borrowing money to short stocks in a company likely to go bankrupt, while telling people to buy This would be fraud, which is illegal independently of any insider trading rules

Why does borrowing money in any way diminish the positive effect of making the stock price more reliable? And how does the incentive to lie to other traders apply only to insider trading? It seems like that would always apply to all trading.

Like I replied to another comment, should judges be allowed to trade on information about judgements he has yet to deliver?

Re: Making Insider Trading Legal

#68

Post by joe_the_user »

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…

You completely ignore the benefit of the more accurate price

The gp does a good job of describing how insider trading actually takes money from particular people. Are you saying that a certain number of people should have their money taken in order that prices are closer to predicting otherwise unknown results? Something like "by eminent domain, we are taking your investment profits for the great good of accuracy in stock prices".

Moreover, the other people who benefit from price jumps from invisible sources are those who don't know anything but who are willing to gamble that these price jumps represent a real increase in value. The existence of such gambling would seem like it increases the overall volatility of the market and given that such gamblers would tend to magnify random jumps in the market as well, it seems like society broadly would not experience any benefit.

Re: Making Insider Trading Legal

#69

Post by lambdapie »

baddox wrote: post #56
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 think the main trouble I'm having with your argument is the idea of it "harming" someone. While that seems to perhaps be true in the most technical sense, I'm not sure it's a sufficient argument for banning insider trading. After all, many things which harm people are not generally considered to be bad. For instance, if someone opens a restaurant Ina town, and runs the restaurant very efficient while offering a hig…

You are right that "harming" someone is not a sufficient reason to ban an action. And as others have pointed out, researching a company carefully causes the same kind of "harm", and certainly shouldn't be banned. My intention was to refute people (like in the article I linked) who argue that all market participants benefit from and insider trader's transaction.

Once we see that this isn't the case, it becomes necessary to do a cost benefit analysis to determine the true effect of allowing insider trading. But as you say, this should be done on a utilitarian basis, not on some imagined "rights" of the counterparty to insider trading. (EDIT: I don't mean to imply that economic analysis from a utilitarian POV can't clarify what we should think of as people's rights, but rather that as you said, causing someone else to have a negative outcome does not prove that someone's rights are being violated)

Re: Making Insider Trading Legal

#70

Post by ikeboy »

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…

See http://clsbluesky.law.columbia.edu/2015/10/25/whats-the-harm...
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