Insider Trading

Economics Economics Questions
1

What is everyone’s take of a ban on insider trading? Let me start by saying that I don’t not believe insider trading is a crime, nor should it be policed by the state. But I believe there is an argument to make for it to be voluntarily banned (through contract) in order to improve the efficiency of the captial markets.

Take for example a stock exchange looking to increase liquiditiy, it could tell the firms that wish to list on its exchange - if you wish to list your stock here, your insiders must agree to not to trade based on non-public information. Of course this would be voluntary not coersed.

The logic as I see it is if insider trading is allowed investors will no longer just be speculating about the valuations of firms but also whether movements in stock prices are a result of knowledge that somebody else has that the trader doesn’t. If I own a stock and I know $40/share is the correct valuation and I see the price start dropping…37…35…31…27…I’m going to be freaking out wondering if there is information out there that I don’t have. Now i’m forced into a situation where I basically have to decide whether to sell or hold based on sheer speculation not any sound financial decision making. The result is more volitility making me less inclined to invest. Less people investing will mean higher spreads, lower stock prices, less liquidity, and slower overall economic growth.

Of course the flip side of the arguement that people make is that insider trading more quickly introduces new information to the market. But I really don’t agree with that statement, because as long as the information is not offically announced, there isn’t anything new information. Just speculation.

I agree that introducing information more quickly is a good thing, but public speculation of movements in stock price is not the same as new information.

Also, if insider trading were to be allowed, wouldn’t there be an incentive to delay the release of new information so the insiders can have time to buy or sell?

Overall, I think the quality of our captial markets would be higher if insider trading were banned and thus absent government intervention the market would move in this direction on its own.

What do you think? Agree with me? Or am I way off?

2

I would prefer to invest in a market where insider trading is illegal. Whether the state polices it or it’s policed by private means is irrelevant to me.

Do you think investment firms should be allowed to frontrun their clients?

3

You’re way off.

What about inside non-trading?

http://www.independent.org/newsroom/article.asp?id=2641

4

Capital markets would be less efficient without inside trading. Insider traders do a lot to reveal the true value of a stock by either selling it or buying it, and so are useful for the rest of us without intimate information about the health of a particular stock. Legal restriction on inside trading was one of the reasons why the stock market was so volatile in 1937, for example.

5

Insider trading is a dyphemism for what is otherwise known as making an informed decision. It happens to be the case that all decisions made by everyone is based on information that not everyone has. Banning informed decisions based on information that not everyone has is an idea that you would expect to find in, say, Lenin.

6

It’s making a decision with information that the public is not privy to. Making an informed decision on privileged information.

7

yes, but don’t individual firms have an incentive to let as little information out as possible? This would result in (the continuation of) contract clauses that prohibit employees from giving out trade secrets or other such sensitive information.

8

I can’t see how having a market where 95% of people are speculating as to what the other 5% are doing is efficient. Sure the insiders know the true value of the security, but the rest of the investors don’t. The only thing they have left to do is speculate as to what the insiders know. How is this supposed to give an accurate valuation for any security. I would imagine stock prices would be jumping wildly all over the place under those conditions.

9

Which is every decision in the universe.

10

What?

11

What does it matter?

The fact that there is a small, yet substantial amount of investors who do have inside information is beneficial to the those who don’t, because by selling or buying stocks those inside traders are putting out information - through prices - relevant to the health of a particular company. 95% of traders aren’t speculating on what 5% of traders are doing. The 5% of inside traders are simply revealing information to the rest of the traders through the price mechanism.

Why? I’m not sure this makes sense. If insider traders are selling their stocks because they know the price is about to drop, perhaps due to some bad news concerning the health of the company, then they make this information available to those who see the drop in price (greater supply of stocks being sold).

12

Every informed descision you make in life is based on the knowledge that you have acquired and most others have not. Should you be banned from acting on any preconceived knowledge? You might as well ban entrepreneurship altogether and turn the market into one big random casino. You might as well ban any purposive action.

13

Tibor Machan, What is Morally Right with Insider Trading

14

I’ll have to think about this.

15

You’re allowed to think about it, but if you act on it, they should lock you up for good.

16

Hahaha.

17

Very clever [:P]

18

I don’t see how it could not matter.

Yes, insider trading should not be illegal in the general sense. But if its a violation of pretty much everybody’s contract to do certain insider trading activities, a lot of them are not going to be done. Unless of course the information is worth more than all the money you could make at your job (and you would likely have to factor in a discount for all future jobs because companies are going to be weary on hiring someone who dishes out secret info.

I guess I am not really sure of how likely people are at getting caught doing this. If people aren’t likely to get caught, then nothing matters really as its already likely happening as much as would happen anyway. If people are very likely to get caught, then I imagine few would suddenly switch over to become insider traders if it was no longer illegal, as they would mostly be retraining from the activity because they more feared being caught by their own company and losing their job.

19

You are “Way On”. Insider trading should be allowed. It should be up to the firms themselves through contracts to prohibit their insiders from engaging in these practices. You could easily write a contract for executives that states explicit disclosure requirements that must be made before they are able to sell or buy stock. You could easily hold part of all of their compensation in escarole to make sure the executives behave according to their contracts.

You could also have them list friends and certainly relatives who could use insider information as well. Then people like Martha would be free to sell or buy with insider information but the person providing the information would be held in breech of their contract.

Another good way to do this is to use the executive compensation held in escarole to pay the legal fees of the company lawyers who will sue the executive for breech of contract. It is amazing how this will entice executives not to break their contracts.

The current insider trading rules are confusing and really do not stop the behavior. I suggest getting rid of the layers of government and substitute contracts that promote freedom and constrain the behavior.

20

See I disagree that they “make the information available”. As an investor all I see is a drop in the price. Not only that, but suppose 95% of people believe the stock to be valued at $40 and the insiders believe it to be valued at $20. The price will fall, but not down to $20, maybe 36 - 37, but not down to its correct level. The rest of us are left to speculate as to what caused the price drop. Should the firm be valued at 37? 30? 20? How am I supposed to make an informed decision in this case? The only thing that was “made available” was that somebody knows something I don’t. What that something is…I don’t know. How does that someting effect the value of the firm…I don’t know. What is the real value of the firm…I don’t know. As a result people will start speculating causing large swings in the stock that otherwise would not have happened.