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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 doi

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?
    - tharkun__ 5y ago
      I would argue that: yes, it is immoral. Is it likely for you to get caught for insider trading? Probably not. Especially if you're Joe Blow and you make 10k on this. If you are Joe Blow making 10k also means you did not have a lot of "play money" to act upon overhearing some random conversation. Or you do but didn't trust it fully (how did you know it was 'material' and not just some guys at a business lunch 'boasting' to each other?) and just did it to test waters or have fun. The larger the sums get I would argue the more likely it is you will get caught because it means you are probably much closer to the actual information than meets the eye. Or it gets caught in some filters based on amount and such that someone starts looking at etc. If you really just completely randomly overhear something like this, how do you judge that it is 'material'? Is someone going to bet his entire savings account on a completely random encounter of overhearing Bill Gates and Warren Buffett discussing something 'material' over lunch and they are in earshot range? And here we are talking major celebrities that probably even Joe Blow would recognize and judge as 'probably material'. You know what? Even though it's still immoral I totally wouldn't judge Joe Blow betting $100 to make $10.000 on that and put it on the mortgage. He probably bets that same thing on some Superbowl weird odds bet each year and looses. More likely? Joe Insider knows exactly when Company X and Company Y are gonna announce some multi billion dollar deal because they've been in talks for months and they work in BI to get the numbers for this deal to them and things seem to be getting close. Get a few trades in with the bonus money or proceeds from the RSUs vesting. Immoral act to make 100k of RSUs into 10 million and be set for life.
      - rosndo 5y ago
        >I would argue that: yes, it is immoral. >Is it likely for you to get caught for insider trading? Probably not. Overhearing something in a restaurant and trading on it is not illegal insider trading. For the purposes of this conversation it would be useful for you to have the most basic understanding of what constitutes illegal insider trading.
        tharkun__ 5y ago
        Maybe I'm misunderstanding what I can find about this online. Please help me understand. Let's say Joe Blow in my example works as a janitor for said company. For the sake of argument, he's directly employed. There is no statutory definition of “insider trading”. As defined by the courts, it refers to purchasing or selling a security while in possession of material, non-public information concerning that security, where the information is obtained from a breach of fiduciary duty, or a duty arising from a relationship of trust or confidence. Obtaining the material information by way of a breach of duty or confidence is the key to an insider trading violation, but after decades of court rulings, it is almost impossible for a court to find that a duty was NOT breached in an insider trading case. Some duties are obvious – the CEO of the company, the CEO’s assistant, and every other employee owe a fiduciary duty to the company and if they use, or disclose, material non-public information, they are liable for insider trading, often even if they didn’t trade themselves. Over the last 10 years, the SEC and the courts have greatly expanded this definition, to include trading by individuals whose “relationship of trust” is so remote as to be non-existent, but that discussion is left for another day https://www.seclaw.com/insider-trading/ https://www.seclaw.com/insider-trading/ Would he not count as "every other employee" in the above for some reason? He overhears a conversation between the CEO of his company and another company about a big deal while he's say fixing the heating in the conference room? Nevermind the likelyhood of that scenario and the really bad practice of discussing such matters in said conference room while he's there (or in a restaurant to go back to the other example but then said janitor would need to frequent the same one as the CEO of his company, which is also an unlikely scenario ;) )
otterley 5y ago
Oh, please. You wouldn't be doing everyone a "service" because you'd be making money (or at least losing less) than the other investors - you'd have a material advantage. If you truly wanted to do the world a service, you would have just publicized their fraud and taken a bath along with everyone else.
- refurb 5y ago
  But the economic award is just the cost of a more correct market price and it happens all the time. For example a mask manufacturer. They might have a relative in China who shares information about the outbreak of a new virus. Manufacturer uses this completely legal information to produce a ton of masks and makes record profits off the sales because they're right. But the public benefits as well because there are actually masks to purchase. And another example are whistleblower payments. We have no problem giving whistleblowers millions of dollars for uncovering fraud because the cost is far lower than the benefit.

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?
  - tharkun__ 5y ago
    I would argue that: yes, it is immoral. Is it likely for you to get caught for insider trading? Probably not. Especially if you're Joe Blow and you make 10k on this. If you are Joe Blow making 10k also means you did not have a lot of "play money" to act upon overhearing some random conversation. Or you do but didn't trust it fully (how did you know it was 'material' and not just some guys at a business lunch 'boasting' to each other?) and just did it to test waters or have fun. The larger the sums get I would argue the more likely it is you will get caught because it means you are probably much closer to the actual information than meets the eye. Or it gets caught in some filters based on amount and such that someone starts looking at etc. If you really just completely randomly overhear something like this, how do you judge that it is 'material'? Is someone going to bet his entire savings account on a completely random encounter of overhearing Bill Gates and Warren Buffett discussing something 'material' over lunch and they are in earshot range? And here we are talking major celebrities that probably even Joe Blow would recognize and judge as 'probably material'. You know what? Even though it's still immoral I totally wouldn't judge Joe Blow betting $100 to make $10.000 on that and put it on the mortgage. He probably bets that same thing on some Superbowl weird odds bet each year and looses. More likely? Joe Insider knows exactly when Company X and Company Y are gonna announce some multi billion dollar deal because they've been in talks for months and they work in BI to get the numbers for this deal to them and things seem to be getting close. Get a few trades in with the bonus money or proceeds from the RSUs vesting. Immoral act to make 100k of RSUs into 10 million and be set for life.
    - rosndo 5y ago
      >I would argue that: yes, it is immoral. >Is it likely for you to get caught for insider trading? Probably not. Overhearing something in a restaurant and trading on it is not illegal insider trading. For the purposes of this conversation it would be useful for you to have the most basic understanding of what constitutes illegal insider trading.
      - tharkun__ 5y ago
        Maybe I'm misunderstanding what I can find about this online. Please help me understand. Let's say Joe Blow in my example works as a janitor for said company. For the sake of argument, he's directly employed. There is no statutory definition of “insider trading”. As defined by the courts, it refers to purchasing or selling a security while in possession of material, non-public information concerning that security, where the information is obtained from a breach of fiduciary duty, or a duty arising from a relationship of trust or confidence. Obtaining the material information by way of a breach of duty or confidence is the key to an insider trading violation, but after decades of court rulings, it is almost impossible for a court to find that a duty was NOT breached in an insider trading case. Some duties are obvious – the CEO of the company, the CEO’s assistant, and every other employee owe a fiduciary duty to the company and if they use, or disclose, material non-public information, they are liable for insider trading, often even if they didn’t trade themselves. Over the last 10 years, the SEC and the courts have greatly expanded this definition, to include trading by individuals whose “relationship of trust” is so remote as to be non-existent, but that discussion is left for another day https://www.seclaw.com/insider-trading/ https://www.seclaw.com/insider-trading/ Would he not count as "every other employee" in the above for some reason? He overhears a conversation between the CEO of his company and another company about a big deal while he's say fixing the heating in the conference room? Nevermind the likelyhood of that scenario and the really bad practice of discussing such matters in said conference room while he's there (or in a restaurant to go back to the other example but then said janitor would need to frequent the same one as the CEO of his company, which is also an unlikely scenario ;) )

otterley 5y ago

Oh, please. You wouldn't be doing everyone a "service" because you'd be making money (or at least losing less) than the other investors - you'd have a material advantage. If you truly wanted to do the world a service, you would have just publicized their fraud and taken a bath along with everyone else.

refurb 5y ago
But the economic award is just the cost of a more correct market price and it happens all the time. For example a mask manufacturer. They might have a relative in China who shares information about the outbreak of a new virus. Manufacturer uses this completely legal information to produce a ton of masks and makes record profits off the sales because they're right. But the public benefits as well because there are actually masks to purchase. And another example are whistleblower payments. We have no problem giving whistleblowers millions of dollars for uncovering fraud because the cost is far lower than the benefit.