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?
At least he wasn't a Keynesian!
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?
Chris Pacia:Or am I way off?
You're way off.
What about inside non-trading?
http://www.independent.org/newsroom/article.asp?id=2641
Chris Pacia: 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.
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.
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.
Caley McKibbin: "Insider trading" is a dyphemism for what is otherwise known as making an informed decision.
"Insider trading" is a dyphemism for what is otherwise known as making an informed decision.
It's making a decision with information that the public is not privy to. Making an informed decision on privileged information.
Jonathan M. F. Catalán: Chris Pacia: 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. 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.
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.
Jonathan M. F. Catalán: 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.
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.
bloomj31:It's making a decision with information that the public is not privy to.
Which is every decision in the universe.
Caley McKibbin: Which is every decision in the universe.
What?
Joe: 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.
What does it matter?
Chris Pacia: 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.
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 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.
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.
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).
bloomj31:It's making a decision with information that the public is not privy to. Making an informed decision on privileged information.
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.
bloomj31: It's making a decision with information that the public is not privy to. Making an informed decision on privileged information.
Tibor Machan, What is Morally Right with Insider Trading
I'll have to think about this.
bloomj31:I'll have to think about this.
You're allowed to think about it, but if you act on it, they should lock you up for good.