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What are your findings in looking at such markets?
Sorry, too busy to do the research now. But people did trade before such regulations. And even today, eg Japan and Germany have notably lighter regulations on insider trading.
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The argument is that instead of having the government decide what's best, the company should decide (and it doesn't need to be during the IPO). Then, the so-called "free market" will decide whether it's good or bad. If they decide it's bad for companies, then companies won't allow it, because it will hurt their stock price. If they decide it's good, then companies will allow it.
Why is free market in scare quotes? And why "so-called"?
> 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…
A core principle of US criminal law is innocent until proven guilty, so this sort of legal framework would have trouble in the US.
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In a perfectly efficient market with perfect information there's no profit to be made. So to make money you either have to be more efficient - either by market-making where you do millions of small trades, or the kind of value investing where you just buy what other people are selling and vice versa and hold them for a while - or you have better information. (Which doesn't have to mean inside information. It's certai…
A perfect market, which is a stupid assumption, can indeed make profit. You are assuming that an economy is a zero sum game but it is not. Transactions are made because both parties come out ahead.
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Why is free market in scare quotes? And why "so-called"?
Because obviously the market won't be completely free: companies deciding on their policy in the proposed regime would most certainly be influenced by factors beyond the question of whether it's good for their stock price.
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Because obviously the market won't be completely free: companies deciding on their policy in the proposed regime would most certainly be influenced by factors beyond the question of whether it's good for their stock price.
Ok that's reasonable. I agree that in theory this argument makes sense. In practice I think the arguments that insider trading is inefficient are compelling enough (see https://news.ycombinator.com/item?id=10487779 ) that it's not worth pursuing this course.
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Ok that's reasonable. I agree that in theory this argument makes sense. In practice I think the arguments that insider trading is inefficient are compelling enough (see https://news.ycombinator.com/item?id=10487779 ) that it's not worth pursuing this course.
Inefficient compared to what? The choice is not between "publicize the info" and "let insiders trade", its between insider trading and no insider trading, and the information stays private.
You are implying that I don't realize that insider trading reveals extra information. But I have clearly stated in almost every post that insider trading would reveal additional information. There's no point continuing this discussion if I am responding to what you say but you're ignoring what I say. I'd ask you to keep an open mind and not assume that other people just need to be enlightened via terse replies.
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…
Let's say I believe that the company I work with is horribly mismanaged. I short it. Then, all of a sudden, an announcement comes ("corp X is going to buy our company") that raises the price and makes me lose my pants. I have two choices now:
a) lose my pants, or
b) use the due-diligence period to try to kill the deal from the inside.
Are you willing to hold stock of a company in which (b) is likely to happen? I don't.
Furthermore, even though a 5% discrepancy is already huge, in many cases it is much larger than that: valeant recently dropped 70% in a few weeks, and insiders knew all about the irregularities1; If allowed to short, a new employee, upon discovering those irregularities, has a great incentives to quit, short, and go to the newspaper. While this would deliver justice much more swiftly to the company, it would do so to the benefit of that individual at the expense of everyone else. We disallow vigilante justice in general for good reasons and this is no different.
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Inefficient compared to what? The choice is not between "publicize the info" and "let insiders trade", its between insider trading and no insider trading, and the information stays private.
Inefficient compared to what? The choice is not between "publicize the info" and "let insiders trade", its between insider trading and no insider trading, and the information stays private. You are implying that I don't realize that insider trading reveals extra information. But I have clearly stated in almost every post that insider trading would reveal additional information. There's no point continuing this discus…
>So (and again, a model is really needed to confirm this) public information is cheaper in terms of its impact on liquidity, than insider information. One thing I'm not certain of is whether many insiders competing to trade on the same information would be as good as public information
That sounded to me like you were against insider trading because it wasn't as efficient as public information. I don't get why that implies we shouldn't allow insider trading.
Your other post said that it necessarily harms someone, but I think that argument was successfully argued against in the link I posted above. Do you have a problem with that part of it?
Also, I would still like it being up to the company. If liquidity is important to them, and the experiment shows that allowing it leads to less liquidity, then eventually they'll stop it.
I don't think that market is inefficient enough to necessitate government action.