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Insider trading is a balance. On the one hand, we want market prices to be accurate. This means we want people with material information to trade on that infor

• JumpCrisscross 8y ago
  > On the other hand, we need some fairness in a market American insider trading law has nothing to do with fairness. It is based on theft of information. In this case, the hacker’s stole information from the SEC that belonged to the reporting companies. (This is a commonly misunderstood alley of securities law.)
  • beaconstudios 8y ago
    if that were the case, it would be legal for a company director to trade on information they gleaned from an internal meeting. Which, as far as I understand, it isn't.
    • mruts 8y ago
      That’s theft from the corporation they work for. GP is 100% correct in this case. Just read Matt Levine’s Money Stuff. He goes over this stuff a lot.
      • EpicEng 8y ago
        I'm not disagreeing with you because I have no clue about this stuff, but man that is an odd usage of the word 'theft'. Sounds more like improper use to me, e.g., getting a speeding ticket while using a company truck. I didn't steal the truck, but I used it in a way which is unlawful.
        • jmalicki 8y ago
          It's more like you were authorized to drive the truck to make deliveries, but you used it to pick up your kids from school and go grocery shopping without your employer's permission, causing wear and tear on the truck that caused economic damage to your employer without their permission.
          • EpicEng 8y ago
            Ok, but the point is that, in either case, the driver isn't going to be charged with motor vehicle theft.
            • jessaustin 8y ago
              Don't assume that insider trading laws make sense...
        • deleted 8y ago
          [deleted]
        • mruts 8y ago
          Well, say your company is going to buy another company. You know about it, and buy shares of tbe other company ahead of the public anouncement. You are essentially stealing from your own company, since your purchase of shares will drive up price and result in your employer paying more than they otherwise would have. Though for the record, I think insider trading should be legal, or at least should be a civil instead of a criminal matter. The purpose of financial markets is decentralized price discovery and preventing the trading of certain types of non-public information is totally counterproductive in that regard.
    • JumpCrisscross 8y ago
      > if that were the case, it would be legal for a company director to trade on information they gleaned from an internal meeting That’s theft of company (read: shareholders’) information by a fiduciary. Remember: America has no statute barring insider trading. The rules were developed through case law. (There’s a hypothetical of “if a company insider shouts material nonpublic information on the street and you trade on it, is that insider trading” that lawyers love to opine on, but to my understanding that’s never come up in court.) This is a common misunderstanding with respect to insider trading.
      • ben509 8y ago
        The 1933 Securities Act, 1934 Securities Exchange Act and the Sarbanes-Oxley Act of 2002 all directly address insider trading.
        • JumpCrisscross 8y ago
          In very limited ways. For example, the 33 Act bans short-swing trading and certain specific activity by holders of more than 10% of a stock. The vast majority of insider trading enforcement is brought forth on securities antifraud and fiduciary obligation statute interpreted through extensive case law.
          • ben509 8y ago
            That's fair, but it's also generally how the modern regulatory state works: Congress lays out a rough sketch of the laws and regulatory agencies and courts hash out the details. And counting incidences of enforcement doesn't tell you where the bulk of doctrine is since someone who plainly violates the law is quickly shut down, while the authorities are forced to play cat and mouse with the ones who skirt the law.
        • throwawaymath 8y ago
          No, they all address illegal insider trading. If all forms of legitimate trading on material nonpublic information were illegal, then information asymmetry in the market would be outlawed. That would make it impossible to legally profit using any kind of financial research.
  • tribune 8y ago
    Not sure why you got downvoted, this is correct. If you, for example, overhear an executive on the street discussing how his company is going to bomb their earnings report, you wouldn't get in trouble for trading on that (if you somehow got "caught"). It's unfair in a sense because you just got lucky and stumbled into material, non-public information, but you also didn't really do anything wrong.
  • ben509 8y ago
    That's interesting. I was digging around, and this piece[1] goes into detail, but early on they summarized the rationale for insider trading laws. "One objection is that it violates the fiduciary duties that corporate employees, as agents, owe to their principals, the shareholders (Wilgus 1910)." That supports the theft formulation. "A related objection is that, because managers control the production of, disclosure of, and access to inside information, they can transfer wealth from outsiders to themselves in an arbitrary and hidden way (Brudney 1979; Clark 1986)." Again, supports the theft formulation. "The economic rationale advanced for prohibiting insider trading is that such trading can adversely affect securities markets (Khanna 1997) or decrease the firm’s value (Haft 1982)." This seems like the fairness argument, though. [1]: https://www.econlib.org/library/Enc/InsiderTrading.html https://www.econlib.org/library/Enc/InsiderTrading.html
    • jessaustin 8y ago
      it violates the fiduciary duties that corporate employees, as agents, owe to their principals, the shareholders Insider trading regs, as currently enforced in USA, get this exactly backwards. Senior C-suiters are not prohibited from trading their firm's stock. They only have to carefully choreograph that trading with respect to other events. They get as much advance time as they need to do this, and as much professional help as they (or the firm) can afford. They get all this time to scheme and pre-arrange, precisely because insider trading laws exist to hammer the lowly middle managers who would like to do their own trading on inside information. The sooner trading based on information occurs, the sooner that information is public. The effect of these regulations is to keep secrets and make misguided investment more likely. All executives of a public corporation are in a conspiracy against the investing public. Insider trading laws function precisely to punish defectors from that conspiracy. This defection should rather be encouraged, so these are yet another set of laws the effect of which is entirely backwards from their supposed justification.
    • JumpCrisscross 8y ago
      These are economic arguments. I was speaking solely to the law.
• gammateam 8y ago
  Sure so insider trading is almost exclusively a creature of the executive branch, with the general antifraud provision under “Section 10b-5” used to prosecute it most of the time, a provision only the securities regulatory can pursue (in conjunction with DOJ for the criminal prong) The legislature fails to have consensus on this topic and hasn’t weighed in since the 1980s (where it was only to add statutory damages if a conviction was achieved, but no clarity regarding how and when it could be achieved) And courts strip or uphold nuances various of the agency’s sentiment leaving this to be largely unsettled territory, all while the people that staff these agencies have the same unclear and misguided (when courts later disagree) view on what kind of trading is or isnt prohibited Other markets are completely exempt: Futures, currencies, metals, nike shoes, non-securities digital assets. I think this aberration for the securities market should be re-evaluated, as it is an expensive dragnet.
• crumpets 8y ago
  >This is mostly to ensure people keep trading. In a world were inside-info is commonplace, trading without it is just stupid. I find this line of reasoning hard to swallow. As an individual I have significantly less info than hedge funds and other professionals but that doesn't change the fact that I want to buy Apple or whatever because I think it will grow over the next 5 years. Now if you add in the scenario where all of the Apple employees are buying and selling based on unreleased earnings, that doesn't change my want to buy the stock at all. How does Tim Cook buying some Apple shares right before good earnings change anything for a regular investor?
  • throwawaymath 8y ago
    Tim Cook (and all other Apple employees) are legally disallowed from buying or selling Apple stock outside of specific, well-defined trading windows. In particular, they cannot legally benefit from unpublished earnings information.
    • saagarjha 8y ago
      > all other Apple employees) are legally disallowed from buying or selling Apple stock outside of specific, well-defined trading windows I don't think this is true, at least for most employees. I think this only applies at higher levels, though of course insider trading laws are still in force.
  • rocqua 8y ago
    It is not so much about the retail investors as it is about the professionals. Most of the market is determined by them, in a world without them, prices will less accurately reflect the 'true value' of stocks. As such, we want to keep them trading. We also kind of want to dis-incentivize the professional traders from engaging in massive corporate espionage. Just because that is an arms-race that isn't very productive.
    • runeks 8y ago
      You keep saying "we" -- who are you speaking for? Your argument that professional traders would stop trading in unison if insider trading laws were abolished seems entirely unconvincing to me.