4 ms·

Can you give a good defense of why you're not for insider trading?

by nickpinkston 16y ago

nostrademons 16y ago
Because I'm an outsider and all those pesky crooks steal my money. Duh.
- nickpinkston 16y ago
  I'm guessing you're serious here, but that's a very unsupported position. I'm for it because it's getting the market more towards perfect information. By them using insider info, stock prices adjust to this information - which is more accurate than without. If you're not sophisticated, that still means the prices are more reasonable. Yes, that means some make money, but that's the cost of a smoother market. Also - computer trading would be able to pick up to differences in trading strategy (by seeing big positions taken) and react quickly - minimizing total profits and bringing prices closer to reality. Also - your company would have a higher incentive to treat you well if you could legally sell the info to Goldman Sachs to trade on and give you a commission. That's the populist side of insider trading.
  - Retric 16y ago
    The problem with insider trading is it leads to stock manipulations which is the opposite of your argument. Pump and dump is possible outside a company, but when you get to write the prospectus there are many more options to mess with the market.
    - nickpinkston 16y ago
      That's not insider information. Trading on real data is insider trading. Manipulating the prospectus is fraud. There's a big difference.
      - Retric 16y ago
        There is nothing illegal about making a company look worse off than it actually is. Couple that with insider information and you can short a stock then release overly pessimistic information. Worse yet, you can decide to delay a product's release for the same effect etc. Think: Pfizer is considering pulling Viagra from the market in response to a possible side effect. then next week After, a full review we find no evidence that any such effect exists.
  - nostrademons 16y ago
    I was only half-serious, but I'll elaborate it into a serious argument anyway. Allowing insider trading will create asymmetric information in the stock market, and that risks creating a "market for lemons" type situation and reducing liquidity. Say that insiders are allowed to trade whenever they want, on whatever information they have. As an outside investor without that information, I should then assume that I will get a raw deal on any trade that I make. The rational action, then, is to avoid trading that stock at all. Even if there're initially lots of non-insiders to trade with, they are all making the same economic calculation, and will come to the same conclusion. Hence, anyone rational will leave the market, and the only people left will be those with inside information, creating a self-fulfilling prophecy. That defeats the whole point of a public stock market. When you think about economics, you can't stop at first-order effects. The immediate effect of insider trading may be to increase the speed with which information gets to the market, but the long-term effect is to destroy the market itself, as every participant then has an incentive not to trade. Anyway, the ironic part of my original comment is that I'm actually not an outsider by most people's POV. I can think of a number of people that would pay good money for upcoming Google product releases, were it not illegal (and grounds for firing). So in strictly personal terms, I'd stand to benefit quite a bit from legalized insider trading, but in academic terms, it'd destroy the system that generally works pretty well.
- yummyfajitas 16y ago
  If insider trading were not illegal, they would not be crooks. Nor would they have the ability to "steal your money" - you would be under no obligation to invest your money in the public markets and you would be well aware that there are better informed people out there.
  - gnaritas 16y ago
    One doesn't have to break a law to be perceived as a crook; it's quite often a moral judgment, not a legal one.
ericb 16y ago
If he can't, I can. Insiders with knowledge are often insiders with control. If I have control, I ruin a quarter while shorting the stock and then, by pushing the earnings into the following quarter, I can go long on our "earnings surprise." At this point I have not done anything to further the interest of the company or influence actual profitability. Instead I have merely made me, and perhaps my friends, a killing at the expense of investors. Now, because investors realize that insider trading, now legal, causes earnings to often be gamed, they are reluctant to invest in honest companies too. Suddenly capital costs are higher for everyone, and my dishonesty creates a drag on the creation of startups, and expansion of successful enterprises.
- nickpinkston 16y ago
  That's the standard story yes, but it's like playing one game and calling it quits. Those who game the system would be found out (perhaps through insider info) and their finance costs would increase. Other firms would take to releasing info themselves in order to set expectations and reduce risk - which already happens, but there'd be a huge driver for more so - lest others trade early on the info. The effect on startups, even in your scenario, would be nil / positive. We already have a ton of risk priced in, and we're not required to file 10K's, etc. Also, most startup boards include the lead investor who has access to all "insider" info already - you don't think they share that with that in future follow on rounds?
  - ericb 16y ago
    Is it your take that this is an iterated Prisoner's Dilemma, so no one will cheat, and everyone will use an honest tit for tat strategy? Except that the payoff for cheating is high enough that you can probably earn enough to stop playing. Additionally, these tricks are difficult to prove--it took years for Enron to unravel. Also, because cheaters can't be predicted in advance and your "cure" is only retroactive, the capital costs are born by everyone. Startups get capital because the business they create will eventually be worth a multiple of their earnings. If that multiple is reduced because of an "insider cheating" penalty, the attractiveness of the investment is reduced, and therefore the amount of investment that will chase it. There is no floor on the risk discount that can be assigned to the price of an investment, except perhaps $0.00.

Can you give a good defense of why you're not for insider trading?

nostrademons 16y ago

Because I'm an outsider and all those pesky crooks steal my money. Duh.

nickpinkston 16y ago
I'm guessing you're serious here, but that's a very unsupported position. I'm for it because it's getting the market more towards perfect information. By them using insider info, stock prices adjust to this information - which is more accurate than without. If you're not sophisticated, that still means the prices are more reasonable. Yes, that means some make money, but that's the cost of a smoother market. Also - computer trading would be able to pick up to differences in trading strategy (by seeing big positions taken) and react quickly - minimizing total profits and bringing prices closer to reality. Also - your company would have a higher incentive to treat you well if you could legally sell the info to Goldman Sachs to trade on and give you a commission. That's the populist side of insider trading.
- Retric 16y ago
  The problem with insider trading is it leads to stock manipulations which is the opposite of your argument. Pump and dump is possible outside a company, but when you get to write the prospectus there are many more options to mess with the market.
  - nickpinkston 16y ago
    That's not insider information. Trading on real data is insider trading. Manipulating the prospectus is fraud. There's a big difference.
    - Retric 16y ago
      There is nothing illegal about making a company look worse off than it actually is. Couple that with insider information and you can short a stock then release overly pessimistic information. Worse yet, you can decide to delay a product's release for the same effect etc. Think: Pfizer is considering pulling Viagra from the market in response to a possible side effect. then next week After, a full review we find no evidence that any such effect exists.
- nostrademons 16y ago
  I was only half-serious, but I'll elaborate it into a serious argument anyway. Allowing insider trading will create asymmetric information in the stock market, and that risks creating a "market for lemons" type situation and reducing liquidity. Say that insiders are allowed to trade whenever they want, on whatever information they have. As an outside investor without that information, I should then assume that I will get a raw deal on any trade that I make. The rational action, then, is to avoid trading that stock at all. Even if there're initially lots of non-insiders to trade with, they are all making the same economic calculation, and will come to the same conclusion. Hence, anyone rational will leave the market, and the only people left will be those with inside information, creating a self-fulfilling prophecy. That defeats the whole point of a public stock market. When you think about economics, you can't stop at first-order effects. The immediate effect of insider trading may be to increase the speed with which information gets to the market, but the long-term effect is to destroy the market itself, as every participant then has an incentive not to trade. Anyway, the ironic part of my original comment is that I'm actually not an outsider by most people's POV. I can think of a number of people that would pay good money for upcoming Google product releases, were it not illegal (and grounds for firing). So in strictly personal terms, I'd stand to benefit quite a bit from legalized insider trading, but in academic terms, it'd destroy the system that generally works pretty well.
yummyfajitas 16y ago
If insider trading were not illegal, they would not be crooks. Nor would they have the ability to "steal your money" - you would be under no obligation to invest your money in the public markets and you would be well aware that there are better informed people out there.
- gnaritas 16y ago
  One doesn't have to break a law to be perceived as a crook; it's quite often a moral judgment, not a legal one.

ericb 16y ago

If he can't, I can. Insiders with knowledge are often insiders with control. If I have control, I ruin a quarter while shorting the stock and then, by pushing the earnings into the following quarter, I can go long on our "earnings surprise." At this point I have not done anything to further the interest of the company or influence actual profitability. Instead I have merely made me, and perhaps my friends, a killing at the expense of investors. Now, because investors realize that insider trading, now legal, causes earnings to often be gamed, they are reluctant to invest in honest companies too. Suddenly capital costs are higher for everyone, and my dishonesty creates a drag on the creation of startups, and expansion of successful enterprises.

nickpinkston 16y ago
That's the standard story yes, but it's like playing one game and calling it quits. Those who game the system would be found out (perhaps through insider info) and their finance costs would increase. Other firms would take to releasing info themselves in order to set expectations and reduce risk - which already happens, but there'd be a huge driver for more so - lest others trade early on the info. The effect on startups, even in your scenario, would be nil / positive. We already have a ton of risk priced in, and we're not required to file 10K's, etc. Also, most startup boards include the lead investor who has access to all "insider" info already - you don't think they share that with that in future follow on rounds?
- ericb 16y ago
  Is it your take that this is an iterated Prisoner's Dilemma, so no one will cheat, and everyone will use an honest tit for tat strategy? Except that the payoff for cheating is high enough that you can probably earn enough to stop playing. Additionally, these tricks are difficult to prove--it took years for Enron to unravel. Also, because cheaters can't be predicted in advance and your "cure" is only retroactive, the capital costs are born by everyone. Startups get capital because the business they create will eventually be worth a multiple of their earnings. If that multiple is reduced because of an "insider cheating" penalty, the attractiveness of the investment is reduced, and therefore the amount of investment that will chase it. There is no floor on the risk discount that can be assigned to the price of an investment, except perhaps $0.00.