Can you give me your definition of a “higher spread”? Are you talking about a wide spread?
And the price mechanism is entirely relevant and one of the most important aspects of the stock market. Investors act on prices. You are still debating on the premise of perfect information; perfect information is a myth. Some people are bound to know more than others. You cannot eliminate uncertainty. Furthermore, inside traders provide certainty because they offer information that would otherwise not be known until some point in the future, by which time the value of the stock could plummet.
If the spread of a particular company’s stock widens it is a reflection on the company’s health. Investors generally avoid stocks with wide spreads for exactly this reason. I should note that spreads depend entirely on prices and the supply and demand of specific stocks.
One of the issues here is that you are looking at the stock market from a very general point of view, while you need to look at it from the perspective of individual stocks (which you should be anyways, since you are talking about spreads). If a particular stock sees an increase in supply as a result of inside trading, because those inside traders are aware of financial problems within a company, and spread increases it signals investors to pull out of that stock.
It doesn’t mean the stock market in general is volatile. It just means that that particular stock is losing value. The point about spreads only reinforces my general point.
Also, I think we should avoid technical jargon, as it makes the argument much more confusing - especially if we start to use jargon incorrectly (not that either you or I have) or one of us doesn’t know the definition of that jargon.
Just proven. What conclusion did you draw and what is your position now?
Also, say I poll sales managers at Best Buy stores and they tell me that Dell laptops outsold HP laptops by a much, much larger margin then previous quarters. Then, before quarterly earnings come publicly out, I go and buy Dell shares and short HP shares based on that. Am I an insider? Was my information public? Do I go to jail?
If you read the OP i said I don’t believe insider trading to be a crime. But rather there are ways to limit it in a free market (ie: through contract). I’m not advocating any government intervention or crimininalization of insider trading at all. I was merely asking the question of…given that it can be limited on the free market - should it be (or would it if we had a free market)?
I think there are valid points on both sides…someone how I got boxed into defending the anti-insider trading position, which I am simply open minded about.
The point being that if insider trading were banned the uninformed traders would be more confident and invest more. Which would improve market quality. Not an original point by me btw, I am simply repeating the standard utilitarian argument against insider trading.
You come back by saying prices would be more accurate and that would improve quality, another good point. Which one is correct, I don’t think we’ll know.
Insider trading affects individual and specific stocks, not the stock market in general. If an inside trader comes and sells stock because he has information others don’t, and thereby reduces the price of the stock, it saves the non-knowledgeable the pain of losing more money than they would otherwise. In other words, had inside traders not devalued the price of the Enron stock it’s very possible that by the time anybody found out Enron was bankrupt all their assets in the stock market would have become worthless, since nobody would have wanted to buy them.
A lot of people did lose out, but they would have lost a lot more had they continue to buy Enron stocks, because no inside traders were there to warn them by selling all their assets.
See that logic doesn’t sit right with me. If Enron’s stock is going down, how is that supposed to signal to me that the executives are cooking the books and Enron faces looming bankruptcy? Furthermore, as far as I know nothing has changed to Enron’s fundamentals. How am I supposed to interpret a declining price when the inside information is NOT made available to me. For all I know, Enron might be a bargin at the lower price. Higher return for the same amount of risk. I might even buy stock in that senario.
This proves my point, as an investor, I want to trade in a market where I succeed or fail based on my talent for evaluating securities. I don’t want to have to play a guessing game everytime stock prices move and wonder if it was due to some information I don’t have. That would render all the financial talent in the world useless and picking stocks would be a crap shoot.
I would be significant less likely to invest in your type of market…which brings me back to the original point…if less people are investing, that’s not a good thing.
Would I have lost more money on Enron in this system compared to yours? Probably. But that is why you diversify. On whole however I would be able to make much more money because I am picking stocks based on financial analysis not sheer speculation.