8 ms·

Legalising insider trading is the simplest solution.

by bidirectional 5y ago

f7ebc20c97 5y ago
Drug dealers are highly opposed to drug legalization.
rosndo 5y ago
Indeed, insider trading benefits everybody by adding more information to the markets, leading to more accurate prices.
- daenz 5y ago
  To people disagreeing with this, can you give a counter argument? On face value, what rosndo said seems to make sense.
  - mchusma 5y ago
    I actually agree it should be legal, but the argument is basically one of fairness. That in the market, retail investors compete against insiders. In practice. The world is unfair, and retail investors must compete against all kinds of people with unfair advantages. If insiders could legally trade, then the ability to profit off insider trading would go down.
    - economist6373 5y ago
      It’s important to understand that the usual argument against insider trading isn’t actually about true fairness, but rather the impression of fairness. These are two different things. The argument that insider trading should be banned because it is somehow disproportionately unfair is quite weak, the argument that it creates an impression of unfairness is a much stronger one. I personally don’t believe it is a particularly good argument, but it is certainly the strongest version of the argument against insider trading.
  - deObfuscate 5y ago
    Their obviously wasn't much thought put in to this. Anywhere that a conflict of interest occurs has potential for abuse. If the officer/employee/agent has the ability to influence the result and profit then their is a conflict of interest. The legal ramifications are lessened and the cost to benefit subsequently decreases. Auditors are a good example. They have privileged information and are responsible for the fairness of financial information / disclosure. Their incentives are already complicated by the compensation structure, i.e. the company they attest for pays their fee and ultimately decides whether they will work together in the future. In this instance, an abolishment to insider trading regulation would ultimately undermine trust in the financial reporting system. The auditors could potentially place bets on their engagements and negotiate results based on their interests. Impartiality would be compromised. There are safeguards in place currently, penalties for insider trading are part of the remedy.
    - economist9374 5y ago
      > The auditors could potentially place bets on their engagements and negotiate results based on their interests. Impartiality would be compromised This is a very odd straw man. What you are describing would still be a crime in a world in which insider trading is legal. I think you are the one who didn’t put much thought into this.
  - QuadmasterXLII 5y ago
    One argument would be that the people who accumulate wealth through insider trading go on to be destructive.
- mlazos 5y ago
  Prices are a function of number of market participants and information of each participant. If insider trading is legal, fewer people will participate in the market because they will lose out due to information asymmetry and this will lead to pricing inefficiencies. What’s interesting is that what others are willing to pay is key public information as well.
  - economist9374 5y ago
    > If insider trading is legal, fewer people will participate in the market because they will lose out due to information asymmetry and this will lead to pricing inefficiencies. This only makes sense in a world where regulators can effectively prevent insider trading, that’s not the world we live in though.
    - viraptor 5y ago
      Does it really? We have a lot of laws and activities where we know there not perfect, yet we set the right incentives. Having laws against murder does not effectively prevent most of murder from happening.
      - economist5932 5y ago
hodgesrm 5y ago
It depends on your definition of the problem. The problem I would like to solve is ensuring that everyone perceives the market as fair, i.e., not tilted toward parties with access to privileged information.
- rosndo 5y ago
  This implies a truly bizarre understanding of markets and fairness. Was it fair when Enron was valued at $70B? Would the situation have been less fair had insider traders with more information pushed the prices down earlier? Insider trading doesn’t cost anybody anything, it simply allows for more accurate pricing which benefits everybody.
  - daenz 5y ago
    That's an interesting perspective. So in a way, insider trading corrects the market because the difference between what is known and what is unknown should not result in a vast difference in valuation.
    - rosndo 5y ago
      Exactly. It is the perspective often repeated by economists. There exists little political will to legalize insider trading because it would be hard to sell to a public that doesn’t even understand why stock markets exist. To the average person on “insider trading” is just bad stuff evil rich people on wall street do. In reality the arguments in favor of banning insider trading are actually quite weak, usually relying on very vague ideas of fairness and public perception. But the idea of “fairness” in markets is an illusion anyway, even without insider trading there will always be those with more information. Someone could follow corporate executives to restaurants, eavesdrop on their conversations and trade on that basis. That wouldn’t be illegal insider trading, would it be fair? I personally believe it would be just as fair as illegal insider trading.
      - deObfuscate 5y ago
        Economists aren't a monolith. Legalizing insider trading does nothing for fairness. The SEC does catch insider trading. And yes, they could do better. Your morals are showing. Just because you can justify it doesn't make it so for most.
mbesto 5y ago
As Matt Levine has rightuflly said: "What’s odd is not that insider trading law is about theft; what’s odd is that it almost looks like it might be about fairness, and that people think it is." "One thing that I often say is that insider trading is not about fairness, it is about theft. Whenever an insider trading case is announced, the prosecutors will make a little speech about how financial markets have to be a level playing field, and how the insider traders are cheaters who got the answers before they took the test, but it is all nonsense. Financial markets are not a level playing field; some people will always have faster computers or better resources or more money to spend on research than others, and they should have incentives to find out information that other people don’t have. But more important, the level-playing-field stuff is just not the law. The law doesn’t say that any time you trade on material nonpublic information it’s illegal. The law, to oversimplify a complicated area, makes it illegal to trade on material nonpublic information that you obtained in violation of a duty to someone: It’s illegal for corporate executives to trade on corporate information for their private gain, or to give that information to their buddies in exchange for a personal benefit, or for outsiders to obtain information in confidence and then betray that confidence by trading on it. The real issue is never whether the trading was unfair to the people on the other side; it’s whether the information was misappropriated from its rightful owners." So how do you make sure the rightful owners have access to the same information? https://www.bloomberg.com/opinion/articles/2019-03-13/you-have-to-pay-the-right-person https://www.bloomberg.com/opinion/articles/2019-03-13/you-ha...
- lupire 5y ago
  > Financial markets are not a level playing field; some people will always have faster computers or better resources or more money to spend on research than others, This is wrong. Being better than someone else doesn't make the playing field unlevel.
  - mbesto 5y ago
    What he's saying is basically: "The basketball court is level. The better basketball player simply has more money when it comes to financial markets." Is a football field unlevel if team A spends more dollars on their lifting program? > This is wrong. P.S. Flat out telling people they are wrong is not a great way to facilitate good faith discussions.
imglorp 5y ago
What about radical transparency: public companies should have constantly visible numbers to everyone. Eliminate the advantage and equalize players. It's the disparity in revenue information, chunked into quarters, that causes the problem. Some people feel entitled to have early access but that's the problem.

Legalising insider trading is the simplest solution.

f7ebc20c97 5y ago

Drug dealers are highly opposed to drug legalization.

rosndo 5y ago

Indeed, insider trading benefits everybody by adding more information to the markets, leading to more accurate prices.

daenz 5y ago
To people disagreeing with this, can you give a counter argument? On face value, what rosndo said seems to make sense.
- mchusma 5y ago
  I actually agree it should be legal, but the argument is basically one of fairness. That in the market, retail investors compete against insiders. In practice. The world is unfair, and retail investors must compete against all kinds of people with unfair advantages. If insiders could legally trade, then the ability to profit off insider trading would go down.
  - economist6373 5y ago
    It’s important to understand that the usual argument against insider trading isn’t actually about true fairness, but rather the impression of fairness. These are two different things. The argument that insider trading should be banned because it is somehow disproportionately unfair is quite weak, the argument that it creates an impression of unfairness is a much stronger one. I personally don’t believe it is a particularly good argument, but it is certainly the strongest version of the argument against insider trading.
- deObfuscate 5y ago
  Their obviously wasn't much thought put in to this. Anywhere that a conflict of interest occurs has potential for abuse. If the officer/employee/agent has the ability to influence the result and profit then their is a conflict of interest. The legal ramifications are lessened and the cost to benefit subsequently decreases. Auditors are a good example. They have privileged information and are responsible for the fairness of financial information / disclosure. Their incentives are already complicated by the compensation structure, i.e. the company they attest for pays their fee and ultimately decides whether they will work together in the future. In this instance, an abolishment to insider trading regulation would ultimately undermine trust in the financial reporting system. The auditors could potentially place bets on their engagements and negotiate results based on their interests. Impartiality would be compromised. There are safeguards in place currently, penalties for insider trading are part of the remedy.
  - economist9374 5y ago
    > The auditors could potentially place bets on their engagements and negotiate results based on their interests. Impartiality would be compromised This is a very odd straw man. What you are describing would still be a crime in a world in which insider trading is legal. I think you are the one who didn’t put much thought into this.
- QuadmasterXLII 5y ago
  One argument would be that the people who accumulate wealth through insider trading go on to be destructive.
mlazos 5y ago
Prices are a function of number of market participants and information of each participant. If insider trading is legal, fewer people will participate in the market because they will lose out due to information asymmetry and this will lead to pricing inefficiencies. What’s interesting is that what others are willing to pay is key public information as well.
- economist9374 5y ago
  > If insider trading is legal, fewer people will participate in the market because they will lose out due to information asymmetry and this will lead to pricing inefficiencies. This only makes sense in a world where regulators can effectively prevent insider trading, that’s not the world we live in though.
  - viraptor 5y ago
    Does it really? We have a lot of laws and activities where we know there not perfect, yet we set the right incentives. Having laws against murder does not effectively prevent most of murder from happening.
    - economist5932 5y ago

hodgesrm 5y ago

It depends on your definition of the problem. The problem I would like to solve is ensuring that everyone perceives the market as fair, i.e., not tilted toward parties with access to privileged information.

rosndo 5y ago
This implies a truly bizarre understanding of markets and fairness. Was it fair when Enron was valued at $70B? Would the situation have been less fair had insider traders with more information pushed the prices down earlier? Insider trading doesn’t cost anybody anything, it simply allows for more accurate pricing which benefits everybody.
- daenz 5y ago
  That's an interesting perspective. So in a way, insider trading corrects the market because the difference between what is known and what is unknown should not result in a vast difference in valuation.
  - rosndo 5y ago
    Exactly. It is the perspective often repeated by economists. There exists little political will to legalize insider trading because it would be hard to sell to a public that doesn’t even understand why stock markets exist. To the average person on “insider trading” is just bad stuff evil rich people on wall street do. In reality the arguments in favor of banning insider trading are actually quite weak, usually relying on very vague ideas of fairness and public perception. But the idea of “fairness” in markets is an illusion anyway, even without insider trading there will always be those with more information. Someone could follow corporate executives to restaurants, eavesdrop on their conversations and trade on that basis. That wouldn’t be illegal insider trading, would it be fair? I personally believe it would be just as fair as illegal insider trading.
    - deObfuscate 5y ago
      Economists aren't a monolith. Legalizing insider trading does nothing for fairness. The SEC does catch insider trading. And yes, they could do better. Your morals are showing. Just because you can justify it doesn't make it so for most.

mbesto 5y ago

As Matt Levine has rightuflly said: "What’s odd is not that insider trading law is about theft; what’s odd is that it almost looks like it might be about fairness, and that people think it is." "One thing that I often say is that insider trading is not about fairness, it is about theft. Whenever an insider trading case is announced, the prosecutors will make a little speech about how financial markets have to be a level playing field, and how the insider traders are cheaters who got the answers before they took the test, but it is all nonsense. Financial markets are not a level playing field; some people will always have faster computers or better resources or more money to spend on research than others, and they should have incentives to find out information that other people don’t have. But more important, the level-playing-field stuff is just not the law. The law doesn’t say that any time you trade on material nonpublic information it’s illegal. The law, to oversimplify a complicated area, makes it illegal to trade on material nonpublic information that you obtained in violation of a duty to someone: It’s illegal for corporate executives to trade on corporate information for their private gain, or to give that information to their buddies in exchange for a personal benefit, or for outsiders to obtain information in confidence and then betray that confidence by trading on it. The real issue is never whether the trading was unfair to the people on the other side; it’s whether the information was misappropriated from its rightful owners." So how do you make sure the rightful owners have access to the same information? https://www.bloomberg.com/opinion/articles/2019-03-13/you-have-to-pay-the-right-person https://www.bloomberg.com/opinion/articles/2019-03-13/you-ha...

lupire 5y ago
> Financial markets are not a level playing field; some people will always have faster computers or better resources or more money to spend on research than others, This is wrong. Being better than someone else doesn't make the playing field unlevel.
- mbesto 5y ago
  What he's saying is basically: "The basketball court is level. The better basketball player simply has more money when it comes to financial markets." Is a football field unlevel if team A spends more dollars on their lifting program? > This is wrong. P.S. Flat out telling people they are wrong is not a great way to facilitate good faith discussions.

imglorp 5y ago

What about radical transparency: public companies should have constantly visible numbers to everyone. Eliminate the advantage and equalize players. It's the disparity in revenue information, chunked into quarters, that causes the problem. Some people feel entitled to have early access but that's the problem.