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I'm still confused as to who is actually harmed by insider trading. Can someone explain?

refurb 7y ago
Harmed by lack of advantage really. But you’re right, if someone wasn’t going to buy a stock unless they had insider knowledge, they are no worse off since they never would have bought it anyways.
- chishaku 7y ago
  What about existing shareholders?
  - refurb 7y ago
    Similar, no? If insider information would lead you to sell ahead of bad info, it’s really losing out on that advantage, since you would have held onto it regardless. The idea of making it legal is that the price would more accurately reflect all info (public and insider).
nradov 7y ago
The concern is more with second order effects. If potential investors who don't have access to insider information think the market is rigged then they'll be less likely to invest, thus increasing the cost of capital for businesses.
- jhhh 7y ago
  Ironically I've heard the exact opposite effect being proposed as a reason for allowing insider trading. If you allow people to profit from their knowledge about inner workings of a company then that information will find its way to the market faster since people are incentivized to take a position and then capitalize on it. Not sure if that's too simple of an explanation but it seems facially plausible. In this framework the market would have more timely information about the state of things so investors could potentially be more likely to invest overall.
will4274 7y ago
The people who don't have insider information. When you adjust for the value actually created by a company, the stock market is a zero sum game. Insider trading moves profit allocation from evenly divided among shareholders to an uneven allocation where shareholders with inside information earn a greater than owed share of the upside.
- alasdair_ 7y ago
  >When you adjust for the value actually created by a company, the stock market is a zero sum game. Not really. For example: if I am a terminal cancer patient that wants liquidity now to do the things I want to do before I die, and you are a pension fund that only really cares about the return thirty years from now, I can trade the stock that I have to you in exchange for money I can spend right now at a price both of us agree on and (this is the important bit) BOTH of us gain from the transaction.
  - clort 7y ago
    The terminal cancer patient and the pension fund are not the entire field of shareholders. Your scenario does not contradict the idea of a zero sum game for the whole stockholdings of a company, or the stockmarket as a whole.
- smabie 7y ago
  Maybe, but what’s more likely in such a scenario would be that the edge gained by insider trading would entirely evaporate. But more to the point, it’s corporations not people who have a rational interest in keeping insider trading illegal. After all, individuals who are insider trading on a company are effectively stealing from said company. Since the corps don’t want their employees taking their money, they have strong incentives to support very tough insider trading laws. In my opinion it should be a civil matter, but the corps and the government have very effectively sold the “stealing from the working man’s retirement fund” in order to justify some very aggressive tactics, previously only reserved from the Mafia and the like.
christophilus 7y ago
“100 to 1 in the stock market” quoted an SEC chairman as saying if insider trading was made legal, the insiders would lose a whole lot of money. In his experience, inside info caused more activity which was generally worse for the actors than inaction. If I remember, I’ll look the quote up when I get home. That book was loaded with great one-liners.
- smabie 7y ago
  https://www.bloomberg.com/opinion/articles/2019-01-16/even-cheaters-don-t-always-win https://www.bloomberg.com/opinion/articles/2019-01-16/even-c... Unless you’re saying that insiders actually are worse than random in beating the market before trading costs, it’s highly unlikely. After all, when not then just trade against the information and make money? Anyways the above Levine post talks about this issue. The dollar weighted win-rate of the Edgar hackers was 77%, which is very very high. This would indicate that inside information is incredibly valuable and that those with access to it have substantial alpha over the market.
baby 7y ago
I'm not sure I have a real answer, but reading about pump and dump schemes on cryptocurrencies I can see why this would be forbidden on real markets.
smabie 7y ago
In actuality, who knows? But the rational for it isn’t fairness, but rather theft. If I work at WalMart and I trade on insider information (let’s say I work on a deal team negotiating to buy a company for WalMart), I’m stealing from my employer, which arguably creates bad incentives. In my opinion insider trading should be a civil issue, but the big corps have successfully convinced the government to take up arms on their behalf under the populist guise of fairness.
tinus_hn 7y ago
If insider trading is allowed the company management can defraud the investors because their own actions influence stock price. So they can just sell their stock, do something that lowers stock price and buy it back.

Harmed by lack of advantage really. But you’re right, if someone wasn’t going to buy a stock unless they had insider knowledge, they are no worse off since they never would have bought it anyways.

chishaku 7y ago
What about existing shareholders?
- refurb 7y ago
  Similar, no? If insider information would lead you to sell ahead of bad info, it’s really losing out on that advantage, since you would have held onto it regardless. The idea of making it legal is that the price would more accurately reflect all info (public and insider).

nradov 7y ago

The concern is more with second order effects. If potential investors who don't have access to insider information think the market is rigged then they'll be less likely to invest, thus increasing the cost of capital for businesses.

jhhh 7y ago
Ironically I've heard the exact opposite effect being proposed as a reason for allowing insider trading. If you allow people to profit from their knowledge about inner workings of a company then that information will find its way to the market faster since people are incentivized to take a position and then capitalize on it. Not sure if that's too simple of an explanation but it seems facially plausible. In this framework the market would have more timely information about the state of things so investors could potentially be more likely to invest overall.

will4274 7y ago

The people who don't have insider information. When you adjust for the value actually created by a company, the stock market is a zero sum game. Insider trading moves profit allocation from evenly divided among shareholders to an uneven allocation where shareholders with inside information earn a greater than owed share of the upside.

alasdair_ 7y ago
>When you adjust for the value actually created by a company, the stock market is a zero sum game. Not really. For example: if I am a terminal cancer patient that wants liquidity now to do the things I want to do before I die, and you are a pension fund that only really cares about the return thirty years from now, I can trade the stock that I have to you in exchange for money I can spend right now at a price both of us agree on and (this is the important bit) BOTH of us gain from the transaction.
- clort 7y ago
  The terminal cancer patient and the pension fund are not the entire field of shareholders. Your scenario does not contradict the idea of a zero sum game for the whole stockholdings of a company, or the stockmarket as a whole.
smabie 7y ago
Maybe, but what’s more likely in such a scenario would be that the edge gained by insider trading would entirely evaporate. But more to the point, it’s corporations not people who have a rational interest in keeping insider trading illegal. After all, individuals who are insider trading on a company are effectively stealing from said company. Since the corps don’t want their employees taking their money, they have strong incentives to support very tough insider trading laws. In my opinion it should be a civil matter, but the corps and the government have very effectively sold the “stealing from the working man’s retirement fund” in order to justify some very aggressive tactics, previously only reserved from the Mafia and the like.

christophilus 7y ago

“100 to 1 in the stock market” quoted an SEC chairman as saying if insider trading was made legal, the insiders would lose a whole lot of money. In his experience, inside info caused more activity which was generally worse for the actors than inaction. If I remember, I’ll look the quote up when I get home. That book was loaded with great one-liners.

smabie 7y ago
https://www.bloomberg.com/opinion/articles/2019-01-16/even-cheaters-don-t-always-win https://www.bloomberg.com/opinion/articles/2019-01-16/even-c... Unless you’re saying that insiders actually are worse than random in beating the market before trading costs, it’s highly unlikely. After all, when not then just trade against the information and make money? Anyways the above Levine post talks about this issue. The dollar weighted win-rate of the Edgar hackers was 77%, which is very very high. This would indicate that inside information is incredibly valuable and that those with access to it have substantial alpha over the market.

baby 7y ago

I'm not sure I have a real answer, but reading about pump and dump schemes on cryptocurrencies I can see why this would be forbidden on real markets.

smabie 7y ago

In actuality, who knows? But the rational for it isn’t fairness, but rather theft. If I work at WalMart and I trade on insider information (let’s say I work on a deal team negotiating to buy a company for WalMart), I’m stealing from my employer, which arguably creates bad incentives. In my opinion insider trading should be a civil issue, but the big corps have successfully convinced the government to take up arms on their behalf under the populist guise of fairness.

tinus_hn 7y ago

If insider trading is allowed the company management can defraud the investors because their own actions influence stock price. So they can just sell their stock, do something that lowers stock price and buy it back.