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Making Insider Trading Legal

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Re: Making Insider Trading Legal

#71

Post by mstade »

Tomte wrote: post #23
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…

Which country is that? Does "illegal" mean criminal liability or just that the sale is void?

Sweden, and in the case of not knowing you were dealing with stolen goods but still found guilty it seems the worst case scenario is six months in prison. [1]

[1]: https://lagen.nu/1962:700#K9P7S1 (Text in Swedish.)

This wasn't always the case, but I can't quite remember when the law changed. It used to be that you could claim you bought the goods "in good faith" in which case you'd be free of liability unless there were other hard evidence to connect you with the crime – even if you bought that high-end watch off of some dude selling watches on the street out of a cardboard box.

These days however, it's much easier to convict someone (whether selling or buying) because of a clause that includes anyone who didn't know but had reason to believe the goods were stolen. It's easier for the prosecution to prove the latter, and probably gets rid of most "it fell off the back of truck" arguments. That high-end watch from that shady dude on the street would probably get you a fine these days. (Putting people in prison is costly, after all.)

Re: Making Insider Trading Legal

#72

Post by giaour »

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…

Possessing stolen property on Wall Street only appears to be a crime if you "knowingly possesses stolen property, with intent to benefit himself or a person other than an owner thereof or to impede the recovery by an owner thereof." [0] This ruling makes the insider trading law more like the law dealing with stolen property.

[0] http://ypdcrime.com/penal.law/article165.htm#p165.40

EDIT: Wikipedia identifies SAC as being based in CT, which has different laws.

Re: Making Insider Trading Legal

#73

Post by mstade »

sneak wrote: post #50
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.

Why, and what consequences?

Re: Making Insider Trading Legal

#74

Post by Natanael_L »

nanis wrote: post #13

If everyone with inside information could trade on it without fearing the law, they would reveal the predicted effect of said information via movements in the price of the security. Therefore, free and legal insider trading would actually increase fairness in the market.

When those insiders represents a minority (in capital available to trade with), the positive effects of their trades from improved price signals can be far smaller than the negative effects from the bad incentives created. Consider a government administrator trading with relatively small sums, knowing what effect his unpublished decisions will have. He can make gains that are large for him, while causing significant losses for others that otherwise wouldn't have happened.

Re: Making Insider Trading Legal

#75

Post by giaour »

lumberjack wrote: post #45
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?

If you pay someone to predict stock movements, and they come to you and say, "short Dell and do not ask me why," you would probably act on that information. After all, you're already employing them for their stock market expertise.

As a private citizen without an army of analysts, you would probably subject their claim to more scrutiny. It sounds like insider trading is only "legal" now if you own a hedge fund.

Re: Making Insider Trading Legal

#76

Post by lambdapie »

ikeboy wrote: post #70
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...

I didn't understand that article, probably because I'm unfamiliar with the author's other works. Is he proposing that a company be allowed to set rules regarding insider trading during the IPO? If so, I agree that in theory this would be efficient (or in the author's terminology, it would be acceptable from a consequentialist POV). But this is orthogonal to the issue. The people who want to ban insider trading would most argue that insider trading is inefficient, and therefore companies would choose not to issue stocks like this. And if they are right, we would still be in the same situation, it's just that instead of people violating a rule created by the government in order to maximize utility, they would be violating a contract created by the company in order to maximize the company's IPO price (which also happens to maximize utility).

Am I missing anything else? Did the author make a specific argument for why insider trading would prove to be efficient (i.e. why the effect on liquidity outweighed the increased information revelation?) I doubt it since the author's language suggest someone familiar with law and philosophy but not so much finance and econ.

Re: Making Insider Trading Legal

#77

Post by skybrian »

joe_the_user wrote: post #61
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…

What about a journalist publishing leaked information? In such a case, it is up to the company to stop leaks. People outside the company have no obligation to help them.

Re: Making Insider Trading Legal

#78

Post by joe_the_user »

lambdapie wrote: post #64
bobcostas55 wrote: post #35

Earlier quoted context omitted.

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.

Theft benefits the thief while costing the person stolen from.

If one can backup and use a fuzzy enough lens, one can just ask "how should society calculate the total benefits here" but the problem is this begs the question of whether it's proper for the state to just ask these questions.

My impression is that none of the insider trading proponents are also proponents of the view that it's not theft to take money that falls off the back of an armored car because "it's hard to who it belongs to" and "we might well benefit from this money more than whoever it really belongs to" but their arguments seem the same. Further, the average people finding money on the street probably really do need it more than your average insider trader.

Re: Making Insider Trading Legal

#79

Post by giaour »

Natanael_L wrote: post #67
baddox wrote: post #57

Earlier quoted context omitted.

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?

That sounds like a question for a professional ethics board. I would assume a judge caught doing that would be sacked, disbarred, and publicly shamed, even if everything he did was strictly legal.

"Wrong" doesn't automatically mean "criminal."

Re: Making Insider Trading Legal

#80

Post by mrchicity »

evanpw wrote: post #44
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…

The other difference is that inside information isn't available on a reasonable and non-discriminatory basis. Traders pay for advantages all the time: Bloomberg terminals, news services, hire better analysts, pay someone to count cars in store parking lots, purchase faster computers or data feeds, but anyone else can do the same. Some players have an advantage, but the playing field itself is relatively level.

With inside information, it's not available to people outside the tipping network at any price. This, more than the mere chance of getting "picked off" by asymmetric information, drives traders out of the market, making it less liquid. If they were just losing because they didn't have good enough analysts, they could always compete and hire more. For the same reason, regulators and exchanges try to keep manipulators out of the market even if they bring a lot of volume. Eventually people will lose confidence in the market itself and leave.

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