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Different POV: Insider trading should be legal because is fundamentally impossible to police fairly or effectively. The one caveat is ALL trades must be public

by toss1 2y ago

Different POV: Insider trading should be legal because is fundamentally impossible to police fairly or effectively. The one caveat is ALL trades must be public in real-time (and not via shell corps, but showing the real beneficial owner). This way, insider trading can do public good by providing good market signals. Transparency would also reduce the advantages of insider trading.

ants_everywhere 2y ago
Someone can correct me if I'm wrong (which I probably am), but my understanding is that legally the harm of insider trading is to the shareholders not to the fairness of the market. So if I have insider knowledge of some earnings at BigCo and I trade on that, I've breached my fiduciary duty and in some sense stolen that info from BigCo. I don't see how your scheme would address that. Or, less abstractly, if you're preparing the earnings announcement for BigCo and you trade knowing earnings are bad, then you've leaked the announcement. And that gets worse, not better, if all trades are public and real time. So I think total transparency in trading and insider trading interact in non-obvious ways.
- chii 2y ago
  > harm of insider trading is to the shareholders not to the fairness of the market. no, insider trading doesn't harm the shareholders, except the ones who sold (or bought) without using said information (compared to someone who did have it). The harm is indeed to the market - information assymetry means the other market participants, like the above shareholder, is not buying/selling as "correctly" as the ones doing insider trading. This also leads to mis-pricing - something that decreases market efficiency. But being so difficult to enforce, insider trading can't be fixed tbh. The best we can do, imho, is to make the signal go faster (which is what transparency aims to do). By making the signal go faster, insiders actually have very little time to actually "inside trade". > leaked the announcement the market _should_ know the earnings are bad. In fact, the market _should_ be making a prediction about the earnings in the aggregate. The information from an insider trader, if it were fully transparent, means that a company's shares will accurately reflect their earnings even if they didnt annouce it, and this makes the market more efficient.
  - Spooky23 2y ago
    Noooo. The presumption of fairness in the market makes the market… without trust, you’ll have less capital, which hurts the shareholders.
  - daemin 2y ago
    If the market had all information then there would be no trading as the price would be correct and nobody would want to buy or sell, as doing so would be money-losing. The market works because of different information, opinions, ideas that are available to different participants. Trading on insider information is like doing a pump and dump, and should be illegal.
    - chii 2y ago
      > there would be no trading as the price would be correct the trading would happen when your personal risk is different from another trader. Future events (that have not yet happened) will also make each individual trader do trading based on their predictions. It's absolutely not true that there's not going to be any trading. After all, unless every trader's internal risk rating and funding are _exactly_ the same, trading must happen, especially if information is very transparent. > should be illegal. just because it's declared illegal, doesn't mean it doesn't happen, nor people don't get away with it. It's why i claim that the next best thing is to _make_ it legal, but force the trade to be revealed instantly rather than have a 1 month time gap. In the event that an insider (or potential insider) starts making large trades, there will be people observing and making similar trades, and thus the insider information (despite being obscured) is transmitted out via this trade signal. The faster this signal gets transmitted, the less insiders will have an opportunity to profit unfairly.
    - toss1 2y ago
      >>nobody would want to buy or sell, as doing so would be money-losing. Somewhat related, there is a saying that caused me great hesitation for many years: "Remember, whatever trade you make, someone else is making the exact opposite bet; what is the likelihood which of you is wrong?". Now, in large, this hesitation is largely good, but not to excess. I then realized that on the exact same trade people can have very different legitimate perspectives that do NOT invalidate yours, i.e., many situations where you can both be right, for your goals. E.g., a trader may have a great reason to sell a stock this minute while a long-term investor has an equally great reason to buy and accumulate the stock. Or, stocks can go in/out of specific investing criteria such as for growth, value, momentum, etc., and different portfolio managers will be selling and buying the same stock at the same minute and both be completely correct about the stock meeting their goals.
- noitpmeder 2y ago
  My understanding was that insider trading is illegal because you are stealing (ideas, plans, news) from the company.
Spooky23 2y ago
That’s pretty much the same as making it illegal. It’s a system of honest graft that requires for work and enforcement. The public metadata would be immensely valuable, and nobody would want to comply. You’d be prosecuting people for concealing ownership.
- toss1 2y ago
  >>You’d be prosecuting people for concealing ownership. Yes, and concealing ownership over the long term is more difficult (in many cases, impossible, e.g., for executives with stock packages — exactly the set of most likely insider traders) and investigating and prosecuting it is far easier vs insider trading. Seems like a win.

by toss1 2y ago

ants_everywhere 2y ago

Someone can correct me if I'm wrong (which I probably am), but my understanding is that legally the harm of insider trading is to the shareholders not to the fairness of the market. So if I have insider knowledge of some earnings at BigCo and I trade on that, I've breached my fiduciary duty and in some sense stolen that info from BigCo. I don't see how your scheme would address that. Or, less abstractly, if you're preparing the earnings announcement for BigCo and you trade knowing earnings are bad, then you've leaked the announcement. And that gets worse, not better, if all trades are public and real time. So I think total transparency in trading and insider trading interact in non-obvious ways.

chii 2y ago
> harm of insider trading is to the shareholders not to the fairness of the market. no, insider trading doesn't harm the shareholders, except the ones who sold (or bought) without using said information (compared to someone who did have it). The harm is indeed to the market - information assymetry means the other market participants, like the above shareholder, is not buying/selling as "correctly" as the ones doing insider trading. This also leads to mis-pricing - something that decreases market efficiency. But being so difficult to enforce, insider trading can't be fixed tbh. The best we can do, imho, is to make the signal go faster (which is what transparency aims to do). By making the signal go faster, insiders actually have very little time to actually "inside trade". > leaked the announcement the market _should_ know the earnings are bad. In fact, the market _should_ be making a prediction about the earnings in the aggregate. The information from an insider trader, if it were fully transparent, means that a company's shares will accurately reflect their earnings even if they didnt annouce it, and this makes the market more efficient.
- Spooky23 2y ago
  Noooo. The presumption of fairness in the market makes the market… without trust, you’ll have less capital, which hurts the shareholders.
- daemin 2y ago
  If the market had all information then there would be no trading as the price would be correct and nobody would want to buy or sell, as doing so would be money-losing. The market works because of different information, opinions, ideas that are available to different participants. Trading on insider information is like doing a pump and dump, and should be illegal.
  - chii 2y ago
    > there would be no trading as the price would be correct the trading would happen when your personal risk is different from another trader. Future events (that have not yet happened) will also make each individual trader do trading based on their predictions. It's absolutely not true that there's not going to be any trading. After all, unless every trader's internal risk rating and funding are _exactly_ the same, trading must happen, especially if information is very transparent. > should be illegal. just because it's declared illegal, doesn't mean it doesn't happen, nor people don't get away with it. It's why i claim that the next best thing is to _make_ it legal, but force the trade to be revealed instantly rather than have a 1 month time gap. In the event that an insider (or potential insider) starts making large trades, there will be people observing and making similar trades, and thus the insider information (despite being obscured) is transmitted out via this trade signal. The faster this signal gets transmitted, the less insiders will have an opportunity to profit unfairly.
  - toss1 2y ago
    >>nobody would want to buy or sell, as doing so would be money-losing. Somewhat related, there is a saying that caused me great hesitation for many years: "Remember, whatever trade you make, someone else is making the exact opposite bet; what is the likelihood which of you is wrong?". Now, in large, this hesitation is largely good, but not to excess. I then realized that on the exact same trade people can have very different legitimate perspectives that do NOT invalidate yours, i.e., many situations where you can both be right, for your goals. E.g., a trader may have a great reason to sell a stock this minute while a long-term investor has an equally great reason to buy and accumulate the stock. Or, stocks can go in/out of specific investing criteria such as for growth, value, momentum, etc., and different portfolio managers will be selling and buying the same stock at the same minute and both be completely correct about the stock meeting their goals.
noitpmeder 2y ago
My understanding was that insider trading is illegal because you are stealing (ideas, plans, news) from the company.

Spooky23 2y ago

That’s pretty much the same as making it illegal. It’s a system of honest graft that requires for work and enforcement. The public metadata would be immensely valuable, and nobody would want to comply. You’d be prosecuting people for concealing ownership.

toss1 2y ago
>>You’d be prosecuting people for concealing ownership. Yes, and concealing ownership over the long term is more difficult (in many cases, impossible, e.g., for executives with stock packages — exactly the set of most likely insider traders) and investigating and prosecuting it is far easier vs insider trading. Seems like a win.