4 ms·

Cheaters are bad for the market. I.e. insider trading, because it destroys trust in the market.

by lixtra 8y ago

logicchains 8y ago
Insider trading isn't necessarily bad for _the market_; it brings more information to the market faster, so prices more accurately reflect all factors. Compare for instance a hedge fund using satellite imagery to notice that a refinery has much less oil and trading on this information vs some exec at the oil refinery trading on that information. The former is completely accepted, because of the information it brings to the market, but its effect on the market is the same as that of the latter. The big problem with insider information is that it generally represents a breach of fiduciary duty; essentially someone is improperly disclosing a corporate secret. See https://en.wikipedia.org/wiki/Insider_trading#Arguments_for_legalizing https://en.wikipedia.org/wiki/Insider_trading#Arguments_for_.... Even Nobel prize winning economist Milton Friedman argued that insider trading should be legal.
- sonnyblarney 8y ago
  Insider trading is definitely bad for the market because there would be no outside investing ever if insider trading was the mode that information came about. Execs have not only access to 'current oil' stores, but basically everything about the company. It'd be crazy to invest in a company where execs can do as they please, it would be utterly gamified and suppressive to the entire market.
  - tormeh 8y ago
    With insider trading, the knowledge of insider traders would be priced in. If you're trying to just buy the market you'd get the same (maybe better?) returns. You'd only lose from insider trading if you were trying to outsmart the market, in which case you'd be at a disadvantage.
    - sonnyblarney 8y ago
      "With insider trading, the knowledge of insider traders would be priced in." Yes and the price would be near 0 (i.e. 'priced in' crazy risk) because nobody is stupid enough to buy shares from those who have massive leverage over them. Would you play poker against a guy who can look at your cards, but you can't look at his? Investing is not just 'putting money in a productive vehicle' it's buying and selling based in information. What person would be stupid enough to trade with someone with a massive information advantage over them? Nobody. You'd have only Private Equity firms and execs owning shares, where the PE firms would have some kind of leverage. There wouldn't be much of a market for equity, there certainly wouldn't be any 'publicly traded companies' because that would be pointless. It would massively depress the market and lead to considerably less investment.
      - logicchains 8y ago
        >Yes and the price would be near 0 (i.e. 'priced in' crazy risk) because nobody is stupid enough to buy shares from those who have massive leverage over them. Even without insider trading laws, it would still be illegal for executives to do things that hurt the company in the name of their own financial gain, as this would be a breach of their fiduciary duty to the company. It's a separate issue to insider trading. >There wouldn't be much of a market for equity, there certainly wouldn't be any 'publicly traded companies' because that would be pointless. This is simply false, as evidenced by the size of other markets that lack insider trading laws, like real estate, commodities or cryptocurrency (or equities markets before insider trading regulations were introduced).
        sonnyblarney 8y ago
        One - you would not knowingly trade with someone who has fundamentally more information than you, so there would be ver y little demand for equities that can be traded by insiders. Two - there would be absolutely no way to prove in most cases, one way or the other if the 'insiders activity' was damaging or not for the company. For example, a bunch of insiders discover something disastrous and start selling cheap, sending a panic into the value of the stock. Is this 'bad for the company'? Or not? Then the 'problem' turns out to be not such a big deal, and they buy back on the cheap. Was this damaging to investors? Even if the insiders were acting legitimately, i.e. selling when something was wrong, buying when it was not ... it would 100% not be in the best interests of other investors - you see from this example that the very nature of 'insider information' makes 100% of trades by insiders 'not in the interests of other investors'. "as evidenced by the size of other markets that lack insider trading laws, like real estate, commodities or cryptocurrency This is wrong. Real estate can generally be independently valued. That's why it's required by law in many countries to have 'independent' assessments of a home's value. Same can be done with commercial. In commodities and currency there are no 'insiders'. There's nothing built into the price but the inherent value of the commodity itself. Corn is corn is corn. Insider trading would definitely apply to a big agri-business, but for corn futures, or USD or even Bitcoin - there literally are no 'insiders'.There are 'insiders' in companies, but a market does not have insiders. Just intelligent people researching, analyzing, with their fingers on the pulse. Demand for stocks would dwindle to nothing without insider trading laws, that's why they exist in every developed market.
- gallerdude 8y ago
  I think that leads to the fundamental question of whether the valuation of a company should be what it is or what people think it is. "What it is" sounds more nuanced, but I think "what people think it is" makes it a lot more approachable for everyday people.
- simonh 8y ago
  I think this view is very naive because it doesn't take into account the perverse incentives legalising insider trading could create. Insiders often also have power over the behaviour of a company, so for example a corporate leader might short his company's stock and then take actions to ruin the business. Or they might release plans for some action that would be seen negatively in the market, depress the stock price, buy, and then change the plans to ones that will attract investors and pocket the difference when the price goes back up. This doesn't improve market information, in fact it's disinformation because those selling on the first announcement were deceived, but how could you prove it? Maybe they would get caught, maybe not, but legalising insider trading creates an incentive for these sorts of behaviour that would not exist otherwise.
  - logicchains 8y ago
    >Insiders often also have power over the behaviour of a company, so for example a corporate leader might short his company's stock and then take actions to ruin the business. Or they might release plans for some action that would be seen negatively in the market, depress the stock price, buy, and then change the plans to ones that will attract investors and pocket the difference when the price goes back up. Legalising insider trading wouldn't legalise such behaviour per se, as such behaviour would still constitute a breach of the leader's fiduciary duties. Look for instance at how Musk was prosecuted for doing that kind of thing; such prosecution was unrelated to insider trading laws, and could still occur without them.

Cheaters are bad for the market. I.e. insider trading, because it destroys trust in the market.

by lixtra 8y ago

Cheaters are bad for the market. I.e. insider trading, because it destroys trust in the market.

Insider trading isn't necessarily bad for _the market_; it brings more information to the market faster, so prices more accurately reflect all factors. Compare for instance a hedge fund using satellite imagery to notice that a refinery has much less oil and trading on this information vs some exec at the oil refinery trading on that information. The former is completely accepted, because of the information it brings to the market, but its effect on the market is the same as that of the latter. The big problem with insider information is that it generally represents a breach of fiduciary duty; essentially someone is improperly disclosing a corporate secret. See https://en.wikipedia.org/wiki/Insider_trading#Arguments_for_legalizing https://en.wikipedia.org/wiki/Insider_trading#Arguments_for_.... Even Nobel prize winning economist Milton Friedman argued that insider trading should be legal.

sonnyblarney 8y ago
Insider trading is definitely bad for the market because there would be no outside investing ever if insider trading was the mode that information came about. Execs have not only access to 'current oil' stores, but basically everything about the company. It'd be crazy to invest in a company where execs can do as they please, it would be utterly gamified and suppressive to the entire market.
- tormeh 8y ago
  With insider trading, the knowledge of insider traders would be priced in. If you're trying to just buy the market you'd get the same (maybe better?) returns. You'd only lose from insider trading if you were trying to outsmart the market, in which case you'd be at a disadvantage.
  - sonnyblarney 8y ago
    "With insider trading, the knowledge of insider traders would be priced in." Yes and the price would be near 0 (i.e. 'priced in' crazy risk) because nobody is stupid enough to buy shares from those who have massive leverage over them. Would you play poker against a guy who can look at your cards, but you can't look at his? Investing is not just 'putting money in a productive vehicle' it's buying and selling based in information. What person would be stupid enough to trade with someone with a massive information advantage over them? Nobody. You'd have only Private Equity firms and execs owning shares, where the PE firms would have some kind of leverage. There wouldn't be much of a market for equity, there certainly wouldn't be any 'publicly traded companies' because that would be pointless. It would massively depress the market and lead to considerably less investment.
    - logicchains 8y ago
      >Yes and the price would be near 0 (i.e. 'priced in' crazy risk) because nobody is stupid enough to buy shares from those who have massive leverage over them. Even without insider trading laws, it would still be illegal for executives to do things that hurt the company in the name of their own financial gain, as this would be a breach of their fiduciary duty to the company. It's a separate issue to insider trading. >There wouldn't be much of a market for equity, there certainly wouldn't be any 'publicly traded companies' because that would be pointless. This is simply false, as evidenced by the size of other markets that lack insider trading laws, like real estate, commodities or cryptocurrency (or equities markets before insider trading regulations were introduced).
      - sonnyblarney 8y ago
        One - you would not knowingly trade with someone who has fundamentally more information than you, so there would be ver y little demand for equities that can be traded by insiders. Two - there would be absolutely no way to prove in most cases, one way or the other if the 'insiders activity' was damaging or not for the company. For example, a bunch of insiders discover something disastrous and start selling cheap, sending a panic into the value of the stock. Is this 'bad for the company'? Or not? Then the 'problem' turns out to be not such a big deal, and they buy back on the cheap. Was this damaging to investors? Even if the insiders were acting legitimately, i.e. selling when something was wrong, buying when it was not ... it would 100% not be in the best interests of other investors - you see from this example that the very nature of 'insider information' makes 100% of trades by insiders 'not in the interests of other investors'. "as evidenced by the size of other markets that lack insider trading laws, like real estate, commodities or cryptocurrency This is wrong. Real estate can generally be independently valued. That's why it's required by law in many countries to have 'independent' assessments of a home's value. Same can be done with commercial. In commodities and currency there are no 'insiders'. There's nothing built into the price but the inherent value of the commodity itself. Corn is corn is corn. Insider trading would definitely apply to a big agri-business, but for corn futures, or USD or even Bitcoin - there literally are no 'insiders'.There are 'insiders' in companies, but a market does not have insiders. Just intelligent people researching, analyzing, with their fingers on the pulse. Demand for stocks would dwindle to nothing without insider trading laws, that's why they exist in every developed market.
gallerdude 8y ago
I think that leads to the fundamental question of whether the valuation of a company should be what it is or what people think it is. "What it is" sounds more nuanced, but I think "what people think it is" makes it a lot more approachable for everyday people.
simonh 8y ago
I think this view is very naive because it doesn't take into account the perverse incentives legalising insider trading could create. Insiders often also have power over the behaviour of a company, so for example a corporate leader might short his company's stock and then take actions to ruin the business. Or they might release plans for some action that would be seen negatively in the market, depress the stock price, buy, and then change the plans to ones that will attract investors and pocket the difference when the price goes back up. This doesn't improve market information, in fact it's disinformation because those selling on the first announcement were deceived, but how could you prove it? Maybe they would get caught, maybe not, but legalising insider trading creates an incentive for these sorts of behaviour that would not exist otherwise.
- logicchains 8y ago
  >Insiders often also have power over the behaviour of a company, so for example a corporate leader might short his company's stock and then take actions to ruin the business. Or they might release plans for some action that would be seen negatively in the market, depress the stock price, buy, and then change the plans to ones that will attract investors and pocket the difference when the price goes back up. Legalising insider trading wouldn't legalise such behaviour per se, as such behaviour would still constitute a breach of the leader's fiduciary duties. Look for instance at how Musk was prosecuted for doing that kind of thing; such prosecution was unrelated to insider trading laws, and could still occur without them.