3 ms·

> Compare insider trading, which we make illegal because it is unfair, even though it improves the price signal. Insider trading is arguably illegal because yo

by vostok 8y ago

> Compare insider trading, which we make illegal because it is unfair, even though it improves the price signal. Insider trading is arguably illegal because you're misappropriating company information for your own use. There a few other technical points, but they can be ignored in a casual conversation. This applies if the CEO told you something that they shouldn't have or if they told you something in confidence and you abused that trust. Trading on information that others don't have is generally legal and investors do it to a much greater extent and to much greater profit than HFTs. > The direct benefit from HFT is that pricing information is updated faster in the market, but is there any need for microsecond resolution pricing? The big direct benefit comes from maintaining fair prices for ETFs and other products whose prices depend on other products. Furthermore, "microsecond" pricing is a very natural system. HFTs and other market makers put out passive limit orders whenever they want. Investors and other aggressive participants send marketable (usually limit) orders if it's the price that they want. It's the far more complicated batch auctions that need to justify their existence.

allenz 8y ago
The SEC says that insider trading is illegal because it "undermines investor confidence in the fairness and integrity of the securities markets".[1] [1] https://www.investor.gov/additional-resources/general-resources/glossary/insider-trading https://www.investor.gov/additional-resources/general-resour... Edit, previous response: Fairness is the "straightforward", "textbook answer" as to why insider trading is illegal. Misappropriating company information" isn't a great justification because insider trading is still illegal even if a company explicitly allowed employees to trade on nonpublic information. [1] https://blogs.wsj.com/law/2011/10/26/why-exactly-is-insider-trading-illegal/* https://blogs.wsj.com/law/2011/10/26/why-exactly-is-insider-...
- vostok 8y ago
  Just to be clear, I'm disagreeing with you because I think you're wrong about the world as it is not because our interests are opposed. I would have far more money if the US had a super complicated batch auction system and everybody could only trade on public information. It would probably only have a tiny, barely noticeable, negative effect on your life in the form of higher spreads for ETFs and various index products. > "Misappropriating company information" isn't a great justification because insider trading is still illegal even if a company explicitly allowed employees to trade on nonpublic information. I am not sure why you are bringing up this specific and very complicated example. Has this been tested in court and I'm just not aware of it? I don't even see how a company could allow its employees to engage in insider trading without it being misappropriation. The company has a responsibility to its shareholders. At a minimum, this policy would have to be disclosed to investors. Investors very frequently use data that is not publicly available. Sometimes it's mosaics that they've put together from smaller pieces of information that are not public, sometimes it's body language of executives in private meetings to which the public does not have access, sometimes it's satellite images, sometimes it's information from IR, and sometimes it's something else. None of this is illegal without additional clarification.
  - allenz 8y ago
    You're right, it was a poor example and I have deleted it. Perhaps we can agree that fairness would be an adequate justification for making insider trading illegal, and by analogy, that it would be an adequate justification for switching to batch auctions. If so, you have the burden of proof to show that the benefits of microsecond resolution outweighs our considerations of fairness.
    - vostok 8y ago
      > Perhaps we can agree that fairness would be an adequate justification for making insider trading illegal I don't think that we agree on this. The way that I see it, investors always try to leverage information asymmetry and I don't see how you could realistically outlaw it. That's what makes HFT so hard. The people who are trading against you inherently know more than you do. They've talked to the companies, they've researched them, etc. Meanwhile HFTs stand by willing to buy and sell just below and just above mid market without any of that information. This is also why HFTs are willing to pay for retail order flow. At least you know that the retail orders probably don't know more than you so you're able to capture a greater fraction of the spread. Of course retail orders are a small fraction of all orders and an even smaller fraction of orders on the exchanges.
      - allenz 8y ago
        I just found the SEC's official justification and amended my original comment above. I don't think you're going to win an argument against the SEC.
        vostok 8y ago
        You may be interested in reading Salman v. United States [1]. It's a dense read so here's a news article [2] that I'll quote. > The justices rejected claims of defense lawyers who argued that there was no crime because no money exchanged hands between the insider and the stock trader. > Instead, the court said exchanges within a family are like gifts and have value, even if no dollars are paid. Sounds a lot like misappropriation is the concern and not merely having access to information that others don't. This is a case that's widely seen as making it easier to prosecute insider trading. [1] https://supreme.justia.com/cases/federal/us/580/15-628/opinion3.html https://supreme.justia.com/cases/federal/us/580/15-628/opini... [2] http://www.latimes.com/business/la-fi-supreme-court-insider-trading-20161206-story.html http://www.latimes.com/business/la-fi-supreme-court-insider-...
- TheCoelacanth 8y ago
  > "Misappropriating company information" isn't a great justification because insider trading is still illegal even if a company explicitly allowed employees to trade on nonpublic information. I can't think of a reason why it would ever be in shareholders' interests to allow insider trading. If a company did ever allow it, it would likely either be a case of company officers misappropriating information from shareholders or a case of majority shareholders misappropriating information from minority shareholders.

by vostok 8y ago

allenz 8y ago

The SEC says that insider trading is illegal because it "undermines investor confidence in the fairness and integrity of the securities markets".[1] [1] https://www.investor.gov/additional-resources/general-resources/glossary/insider-trading https://www.investor.gov/additional-resources/general-resour... Edit, previous response: Fairness is the "straightforward", "textbook answer" as to why insider trading is illegal. Misappropriating company information" isn't a great justification because insider trading is still illegal even if a company explicitly allowed employees to trade on nonpublic information. [1] https://blogs.wsj.com/law/2011/10/26/why-exactly-is-insider-trading-illegal/* https://blogs.wsj.com/law/2011/10/26/why-exactly-is-insider-...

vostok 8y ago
Just to be clear, I'm disagreeing with you because I think you're wrong about the world as it is not because our interests are opposed. I would have far more money if the US had a super complicated batch auction system and everybody could only trade on public information. It would probably only have a tiny, barely noticeable, negative effect on your life in the form of higher spreads for ETFs and various index products. > "Misappropriating company information" isn't a great justification because insider trading is still illegal even if a company explicitly allowed employees to trade on nonpublic information. I am not sure why you are bringing up this specific and very complicated example. Has this been tested in court and I'm just not aware of it? I don't even see how a company could allow its employees to engage in insider trading without it being misappropriation. The company has a responsibility to its shareholders. At a minimum, this policy would have to be disclosed to investors. Investors very frequently use data that is not publicly available. Sometimes it's mosaics that they've put together from smaller pieces of information that are not public, sometimes it's body language of executives in private meetings to which the public does not have access, sometimes it's satellite images, sometimes it's information from IR, and sometimes it's something else. None of this is illegal without additional clarification.
- allenz 8y ago
  You're right, it was a poor example and I have deleted it. Perhaps we can agree that fairness would be an adequate justification for making insider trading illegal, and by analogy, that it would be an adequate justification for switching to batch auctions. If so, you have the burden of proof to show that the benefits of microsecond resolution outweighs our considerations of fairness.
  - vostok 8y ago
    > Perhaps we can agree that fairness would be an adequate justification for making insider trading illegal I don't think that we agree on this. The way that I see it, investors always try to leverage information asymmetry and I don't see how you could realistically outlaw it. That's what makes HFT so hard. The people who are trading against you inherently know more than you do. They've talked to the companies, they've researched them, etc. Meanwhile HFTs stand by willing to buy and sell just below and just above mid market without any of that information. This is also why HFTs are willing to pay for retail order flow. At least you know that the retail orders probably don't know more than you so you're able to capture a greater fraction of the spread. Of course retail orders are a small fraction of all orders and an even smaller fraction of orders on the exchanges.
    - allenz 8y ago
      I just found the SEC's official justification and amended my original comment above. I don't think you're going to win an argument against the SEC.
      - vostok 8y ago
        You may be interested in reading Salman v. United States [1]. It's a dense read so here's a news article [2] that I'll quote. > The justices rejected claims of defense lawyers who argued that there was no crime because no money exchanged hands between the insider and the stock trader. > Instead, the court said exchanges within a family are like gifts and have value, even if no dollars are paid. Sounds a lot like misappropriation is the concern and not merely having access to information that others don't. This is a case that's widely seen as making it easier to prosecute insider trading. [1] https://supreme.justia.com/cases/federal/us/580/15-628/opinion3.html https://supreme.justia.com/cases/federal/us/580/15-628/opini... [2] http://www.latimes.com/business/la-fi-supreme-court-insider-trading-20161206-story.html http://www.latimes.com/business/la-fi-supreme-court-insider-...
TheCoelacanth 8y ago
> "Misappropriating company information" isn't a great justification because insider trading is still illegal even if a company explicitly allowed employees to trade on nonpublic information. I can't think of a reason why it would ever be in shareholders' interests to allow insider trading. If a company did ever allow it, it would likely either be a case of company officers misappropriating information from shareholders or a case of majority shareholders misappropriating information from minority shareholders.