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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 insi

by 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.
    - economist9374 5y ago
      So, you don’t actually have an argument to make? > Legalizing insider trading does nothing for fairness But it does, it increases information available to the public.
      - deObfuscate 5y ago
        I don't have an argument. You don't need to argue to contribute. My contribution was pointing out persuasive writing devices often used to add credibility to one’s argument but are not supported by any logic or reasoning in his comment. > But it does, it increases information available to the public. A little less pedantically for those who enjoy repetition and are prone to dogma, more information is not always better. In this case, as is in general, there should be some qualitative analysis, e.g., the type of information, how it was gathered, its method of distribution,...etc. On another note, the Efficient Market Hypothesis (EMH) is not reality. I say this because you have used several core tenets in your discourse repeatedly. I acknowledge the high probability that I am most likely dealing with a college student fresh out of introductory Macro. Yes, the class is interesting and exciting. Here is a lesson, EMH is a model used to help us reason about the market. Its an abstraction based on an abundance of simplifying assumptions, ceteris paribus. Anybody who does not disabuse themself of this notion that EMH follows reality is a fine and perfectly capable person who may make a lot of money some day (fingers crossed), but they don't really add much to the conversation. Finally, unrelated to the aforementioned, yet I don’t care to answer any more of your responses to my posts, so I’ll add this here: look up the ‘straw man fallacy.’ I tend to shy away from using biases and fallacies in general discussion, they seem to miss more than they hit. However, my distaste doesn’t stem from those who use them effectively to facilitate when they hold relevance. No, my distaste comes from those who use them as the argument itself. It is lazy and adds nothing to of value, much like allowing insider trading. If you can explain what makes my example of financial auditors' a 'straw man', especially when it was solicited by a general question asking for examples, then you can claim you 'dominated the conversation' / won or whatever this is. https://en.wikipedia.org/wiki/Straw_man https://en.wikipedia.org/wiki/Straw_man - here is a link, figure it out.
woodruffw 5y ago
> Insider trading doesn’t cost anybody anything, it simply allows for more accurate pricing which benefits everybody. Insider trading has an institutional cost: it's corrosive to trust in the market. Retail investors are less likely to make optimal investment decisions if they think that insiders are lurking around every corner. That trust is further diminished if retail investors believe that insiders are not just investing based on insider information, but speculating on higher-order instruments. It's perfectly fair to note that our current regulations against insider trading aren't ideal, and that the SEC only catches a tiny fraction of all insider trading. But the threat of enforcement does serve as an important root of trust in the market, and removing it is unlikely to serve individual investors well.
- rosndo 5y ago
  > Retail investors are less likely to make optimal investment decisions if they think that insiders are lurking around every corner. But the reality is that there are insiders lurking around every corner. The argument is essentially that we should seek to actively mislead retail investors instead of simply acknowledging this fact. To me that feels dishonest.
  - woodruffw 5y ago
    I think it would be dishonest to do so actively, which is why I try to acknowledge that the SEC's current ability to enforce insider trading laws is relatively weak and ineffective. I think it's my civic duty to not only inform others of that fact, but also to advocate for better enforcement.
    - economist6373 5y ago
      Good enforcement is impossible. You can never meaningfully hinder insider trading, far too many people have access to insider information. They don’t have to make the trades themselves either. > I think it would be dishonest to do so actively That is what the government is doing via legislation.
deObfuscate 5y ago
So, if I were a trader at Enron who made good money trading electricity and gas then used that money to short the stock based on private information, I'd be doing everyone a service and fighting for fairness. Better yet, I could be one of their auditors at Arthur Andersen.
- daenz 5y ago
  I think the point that they're making is that there wouldn't be a large opportunity to short Enron if people were insider trading from the very beginning. The price of the stock would be more accurate from the beginning, because people would trade at the first sign of an opportunity to benefit from insider information.
  - deObfuscate 5y ago
    Personally, I think the argument is interesting. Let us split it into technical and cultural concerns. A market changes according to flow and distribution of public and private information. The more publoc information, the more accurately priced the stock. Insider information increases public information indirectly through trading said stock. From a cultural standpoint, many people do not trade on insider information because it is seen as unfair or immoral. A number of people abstain because it is illegal. Some do trade based on self interest and the disproprotiate personal gains to risk involved. Nowhere, in any of this is the quality and manner of disclosure. Ultimately, it just creates another financial game where people race to see who can get the information quickest. Needless to say, the systems of reporting in corporations would adjust and the largest share of gains would be made by those who have large holdings of stock. At the same time, it takes away a measure of enforcement and adds traders who were deterred by laws and morals.
    - economist9374 5y ago
      > From a cultural standpoint, many people do not trade on insider information because it is seen as unfair or immoral Is it immoral to trade on material nonpublic information you happened to overhear in a restaurant?
MichaelBurge 5y ago
If insider trading is legal, you could actively destroy a company from the inside and profit from its downfall. Like you could buy put options to set up a leveraged short position, take all the company's money, set it on fire in public(or make a stupid acquisition so you can't easily be sued by other shareholders), watch the stock price drop in a predictable manner, and profit from the predictable decrease in equity. Sort of like how you can't buy life insurance and then immediately commit suicide and still get paid out.
- economist6373 5y ago
  > If insider trading is legal, you could actively destroy a company from the inside and profit from its downfall. What you are describing is an entirely different kind of misconduct than “insider trading”.
  - rcMgD2BwE72F 5y ago
    Yes but it is one that insider trading incentivizes greatly.
    - economist6373 5y ago
      This doesn’t make any sense. Such activities would be criminal regardless of insider trading. What difference could it possibly make if insider trading was legal? Should we maybe add more laws to forbid such activity in different creative ways, so instead of being doubly illegal it would be triply illegal? Crazy.
      - rcMgD2BwE72F 5y ago
        >Such activities would be criminal regardless of insider trading. What difference could it possibly make if insider trading was legal? Killing your neighbors with a gun is illegal in both France and US? Here in France, one cannot purchase a gun. Guess what happens when you make gun sale as easy as possible? Oh but people can own gun, they just should not use them illegally! Right?

by rosndo 5y ago

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.
  - economist9374 5y ago
    So, you don’t actually have an argument to make? > Legalizing insider trading does nothing for fairness But it does, it increases information available to the public.
    - deObfuscate 5y ago
      I don't have an argument. You don't need to argue to contribute. My contribution was pointing out persuasive writing devices often used to add credibility to one’s argument but are not supported by any logic or reasoning in his comment. > But it does, it increases information available to the public. A little less pedantically for those who enjoy repetition and are prone to dogma, more information is not always better. In this case, as is in general, there should be some qualitative analysis, e.g., the type of information, how it was gathered, its method of distribution,...etc. On another note, the Efficient Market Hypothesis (EMH) is not reality. I say this because you have used several core tenets in your discourse repeatedly. I acknowledge the high probability that I am most likely dealing with a college student fresh out of introductory Macro. Yes, the class is interesting and exciting. Here is a lesson, EMH is a model used to help us reason about the market. Its an abstraction based on an abundance of simplifying assumptions, ceteris paribus. Anybody who does not disabuse themself of this notion that EMH follows reality is a fine and perfectly capable person who may make a lot of money some day (fingers crossed), but they don't really add much to the conversation. Finally, unrelated to the aforementioned, yet I don’t care to answer any more of your responses to my posts, so I’ll add this here: look up the ‘straw man fallacy.’ I tend to shy away from using biases and fallacies in general discussion, they seem to miss more than they hit. However, my distaste doesn’t stem from those who use them effectively to facilitate when they hold relevance. No, my distaste comes from those who use them as the argument itself. It is lazy and adds nothing to of value, much like allowing insider trading. If you can explain what makes my example of financial auditors' a 'straw man', especially when it was solicited by a general question asking for examples, then you can claim you 'dominated the conversation' / won or whatever this is. https://en.wikipedia.org/wiki/Straw_man https://en.wikipedia.org/wiki/Straw_man - here is a link, figure it out.

woodruffw 5y ago

> Insider trading doesn’t cost anybody anything, it simply allows for more accurate pricing which benefits everybody. Insider trading has an institutional cost: it's corrosive to trust in the market. Retail investors are less likely to make optimal investment decisions if they think that insiders are lurking around every corner. That trust is further diminished if retail investors believe that insiders are not just investing based on insider information, but speculating on higher-order instruments. It's perfectly fair to note that our current regulations against insider trading aren't ideal, and that the SEC only catches a tiny fraction of all insider trading. But the threat of enforcement does serve as an important root of trust in the market, and removing it is unlikely to serve individual investors well.

rosndo 5y ago
> Retail investors are less likely to make optimal investment decisions if they think that insiders are lurking around every corner. But the reality is that there are insiders lurking around every corner. The argument is essentially that we should seek to actively mislead retail investors instead of simply acknowledging this fact. To me that feels dishonest.
- woodruffw 5y ago
  I think it would be dishonest to do so actively, which is why I try to acknowledge that the SEC's current ability to enforce insider trading laws is relatively weak and ineffective. I think it's my civic duty to not only inform others of that fact, but also to advocate for better enforcement.
  - economist6373 5y ago
    Good enforcement is impossible. You can never meaningfully hinder insider trading, far too many people have access to insider information. They don’t have to make the trades themselves either. > I think it would be dishonest to do so actively That is what the government is doing via legislation.

deObfuscate 5y ago

So, if I were a trader at Enron who made good money trading electricity and gas then used that money to short the stock based on private information, I'd be doing everyone a service and fighting for fairness. Better yet, I could be one of their auditors at Arthur Andersen.

daenz 5y ago
I think the point that they're making is that there wouldn't be a large opportunity to short Enron if people were insider trading from the very beginning. The price of the stock would be more accurate from the beginning, because people would trade at the first sign of an opportunity to benefit from insider information.
- deObfuscate 5y ago
  Personally, I think the argument is interesting. Let us split it into technical and cultural concerns. A market changes according to flow and distribution of public and private information. The more publoc information, the more accurately priced the stock. Insider information increases public information indirectly through trading said stock. From a cultural standpoint, many people do not trade on insider information because it is seen as unfair or immoral. A number of people abstain because it is illegal. Some do trade based on self interest and the disproprotiate personal gains to risk involved. Nowhere, in any of this is the quality and manner of disclosure. Ultimately, it just creates another financial game where people race to see who can get the information quickest. Needless to say, the systems of reporting in corporations would adjust and the largest share of gains would be made by those who have large holdings of stock. At the same time, it takes away a measure of enforcement and adds traders who were deterred by laws and morals.
  - economist9374 5y ago
    > From a cultural standpoint, many people do not trade on insider information because it is seen as unfair or immoral Is it immoral to trade on material nonpublic information you happened to overhear in a restaurant?

MichaelBurge 5y ago

If insider trading is legal, you could actively destroy a company from the inside and profit from its downfall. Like you could buy put options to set up a leveraged short position, take all the company's money, set it on fire in public(or make a stupid acquisition so you can't easily be sued by other shareholders), watch the stock price drop in a predictable manner, and profit from the predictable decrease in equity. Sort of like how you can't buy life insurance and then immediately commit suicide and still get paid out.

economist6373 5y ago
> If insider trading is legal, you could actively destroy a company from the inside and profit from its downfall. What you are describing is an entirely different kind of misconduct than “insider trading”.
- rcMgD2BwE72F 5y ago
  Yes but it is one that insider trading incentivizes greatly.
  - economist6373 5y ago
    This doesn’t make any sense. Such activities would be criminal regardless of insider trading. What difference could it possibly make if insider trading was legal? Should we maybe add more laws to forbid such activity in different creative ways, so instead of being doubly illegal it would be triply illegal? Crazy.
    - rcMgD2BwE72F 5y ago
      >Such activities would be criminal regardless of insider trading. What difference could it possibly make if insider trading was legal? Killing your neighbors with a gun is illegal in both France and US? Here in France, one cannot purchase a gun. Guess what happens when you make gun sale as easy as possible? Oh but people can own gun, they just should not use them illegally! Right?