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OT but I never understood the issue with insider trading. Obviously it's unfair to unknowing traders but isn't this essentially just making the market more refl

by air7 6y ago

OT but I never understood the issue with insider trading. Obviously it's unfair to unknowing traders but isn't this essentially just making the market more reflective of reality? How does it undermine the market?

sukilot 6y ago
That is the main argument in favor of insider trading. But why would I ever invest in a company if I knew that my gains would be stolen by people with secret knowledge? If you allow insider trading, then you eliminate the incentive for outsider investing And that means that we don't have public companies, only private companies.
- derefr 6y ago
  "Eliminating the incentive for outsider trading" is one way to think of it. Another way to think of it is that it creates an incentive for corporate espionage, so that outsiders may gain insider information. In a world where corporate espionage is not itself illegal, the market would then be composed of private companies plus external "auditors" who are slipped in by all interested shareholders whether the private companies like it or not. ...which is oddly similar to governments performing intelligence on allies.
diydsp 6y ago
imagine an insider knows a product is going to tank, so she sells all of her shares before everyone else. at that point of sale, the reality is the product sucks. but the market still reflects the price of a good product. so they know reality before everyone else, keep everyone else in fantasy, and trade at the fantasy price. it further undermines the market bc no one will invest in companies who bail out with at the high price and leave them holding the bag. e.g. if someone asked me to buy 1k shares @ $100 each and i buy them: the product is a dud in R&D. the insiders all sell near the $100 price, the product is a dud in the market, share prices tanks to $30. Next my "friend" asks me to invest I tell him to pound sand.
skybrian 6y ago
Matt Levine writes about this sometimes: > In insider trading, famously, nobody quite knows what “legal” means. There is no statute defining or prohibiting insider trading, and the Securities and Exchange Commission rules on it are slim. But there are some judicially created rules that more or less make sense, that focus, roughly speaking, on whether insiders are using someone else’s information for their own gain. (A question that has nothing to do with market fairness, by the way.) But those rules are hazy and much disputed, and they aren’t written down in one place. https://www.bloomberg.com/opinion/articles/2018-10-15/insider-trading-isn-t-so-simple https://www.bloomberg.com/opinion/articles/2018-10-15/inside... When a company employee is told something that's a secret and they trade on it or tell someone else then that's betraying that trust. If someone outside the firm figures it out, say from satellite photos or something like that, then it's not.

by air7 6y ago

sukilot 6y ago

That is the main argument in favor of insider trading. But why would I ever invest in a company if I knew that my gains would be stolen by people with secret knowledge? If you allow insider trading, then you eliminate the incentive for outsider investing And that means that we don't have public companies, only private companies.

derefr 6y ago
"Eliminating the incentive for outsider trading" is one way to think of it. Another way to think of it is that it creates an incentive for corporate espionage, so that outsiders may gain insider information. In a world where corporate espionage is not itself illegal, the market would then be composed of private companies plus external "auditors" who are slipped in by all interested shareholders whether the private companies like it or not. ...which is oddly similar to governments performing intelligence on allies.

diydsp 6y ago

imagine an insider knows a product is going to tank, so she sells all of her shares before everyone else. at that point of sale, the reality is the product sucks. but the market still reflects the price of a good product. so they know reality before everyone else, keep everyone else in fantasy, and trade at the fantasy price. it further undermines the market bc no one will invest in companies who bail out with at the high price and leave them holding the bag. e.g. if someone asked me to buy 1k shares @ $100 each and i buy them: the product is a dud in R&D. the insiders all sell near the $100 price, the product is a dud in the market, share prices tanks to $30. Next my "friend" asks me to invest I tell him to pound sand.

skybrian 6y ago

Matt Levine writes about this sometimes: > In insider trading, famously, nobody quite knows what “legal” means. There is no statute defining or prohibiting insider trading, and the Securities and Exchange Commission rules on it are slim. But there are some judicially created rules that more or less make sense, that focus, roughly speaking, on whether insiders are using someone else’s information for their own gain. (A question that has nothing to do with market fairness, by the way.) But those rules are hazy and much disputed, and they aren’t written down in one place. https://www.bloomberg.com/opinion/articles/2018-10-15/insider-trading-isn-t-so-simple https://www.bloomberg.com/opinion/articles/2018-10-15/inside... When a company employee is told something that's a secret and they trade on it or tell someone else then that's betraying that trust. If someone outside the firm figures it out, say from satellite photos or something like that, then it's not.