3 ms·

In the past, we liked to pretend this was illegal. Now we don't even bother with that.

eru 2y ago
Insider trading in the US is more about misappropriating information that belong to a party you have fiduciary duties to, not so much about harm to the public. For example, imagine you are working for Warren Buffet and you learn that he has quietly bought some stocks and next weeks he's going to announce that. Assume that this announcement will reliably make the stock trade up. If you trade on that information, that's insider trading by US laws. However, now imagine that you are Warren Buffet. You just quietly bought some stock, and you plan to announce that fact next week. If you trade on that information about your intentions, that's not insider trading by US law: you are allowed to trade on your own private intentions and information. Notice that from the point of view of the anonymous counter party trading with you on the stock exchange, both situations look exactly the same. That's an illustration that insider trading law in the US is not supposed to protect the public. (At least not originally.) So making insider trading legal in the US wouldn't make the general public any worse off. Of course, IANAL applies. The above explanation is mostly paraphrased from Matt Levine's Money Stuff.
- dataflow 2y ago
  > Notice that from the point of view of the anonymous counter party trading with you on the stock exchange, both situations look exactly the same. [...] So making insider trading legal in the US wouldn't make the general public any worse off. Eh? If nothing else, doesn't it magnify the public's risk beyond whatever impact Buffet could have on his own? How can you possibly claim there is no difference? You might as well say: imagine you secretly give another country nuclear weapons, and assume that that country plans to use them. Now imagine you plan to use them for the same purpose yourself. From the viewpoint of the public, the situation is exactly the same. So nuclear proliferation wouldn't make the general public any worse off. Or imagine the president picks a random person by lottery every day to run the country while he goes to play golf. The president can take the same actions himself, so from the standpoint of the general public, nobody would be worse off.
  - eru 2y ago
    > Eh? If nothing else, doesn't it magnify the public's risk beyond whatever impact Buffet could have on his own? How can you possibly claim there is no difference? Let me be more explicit: Warren Buffett usually doesn't physically execute his own trades. So the only difference between the two scenarios I outlined is that in the second one Warren Buffett tells you (as his employee) to trade. In the first one, you trade without him telling you to do so. But it's the same person doing the trades in either scenario. > Or imagine the president picks a random person by lottery every day to run the country while he goes to play golf. The president can take the same actions himself, so from the standpoint of the general public, nobody would be worse off. Sortition might actually be a good idea. https://en.wikipedia.org/wiki/Sortition https://en.wikipedia.org/wiki/Sortition
    - dataflow 2y ago
      You completely missed the point. It had nothing to do with who is executing the trades. >> If nothing else, doesn't it magnify the public's risk beyond whatever impact Buffet could have on his own? I am saying that when you let others pull the same trick in addition to Buffet himself, they can now bring their own additional funds to play with -- meaning they can make more trades and cause even more damage than Buffet could inflict on his own. This clearly enlarges the blast radius and allows more harm to the public than Buffet could cause with his own funds. It is ludicrous to close your eyes and suggest the situation is no different, just like it is by suggesting that there's no difference between one country having nukes vs. N of them having them. Heck, the fact that Warren Buffet is used as the example here instead of some random John Doe makes it clear how intentionally ridiculous the example is: for this to even pass the laugh test and obscure the reality of the situation, you have to pick one of richest people of all time, so that even aggregating a thousand other random strangers' funds together would still miss his purchasing power by multiple orders of magnitude. Why don't you start with someone poor instead of Buffet, then add Buffet to the equation, then try to claim that bringing the billionaire into the equation makes no difference, rather than the other way around?
      - eru 2y ago
- vanviegen 2y ago
  Insider trading around Warren Buffett seems like a really odd example. More typical would be company employees knowing the quarterly results before they are published. And there, it's easy to see how the law is protecting the public by leveling the playing field.
  - eru 2y ago
    Even in your example the law ain't leveling the playing field: the company is allowed to trade on its quarterly earnings ahead of publishing them.
  - wahern 2y ago
    Technically the law is protecting the share holders. Legal scholars, regulators, and even judges have continually tried to push the fraud-on-the-market theory of insider trading, but IIRC it's been firmly rejected by SCOTUS multiple times. There are statutes where the fraud-on-the-market principal pertains, but for your typical insider trading case predicated on Securities Exchange Act jurisprudence, it doesn't fly. Courts have said it would sweep far too broadly and significantly expand the scope of criminal liability (e.g. end up in prison for trading on something you overheard at the coffee shop). As insider trading law has been largely constructed by the courts (the statute its rooted in says nothing about "insider trading"), Congress would have to be explicit about a further expansion of criminal liability.
    - eru 2y ago
      Yes. And there's also no bans on equivalent 'insider trading' for foreign exchange nor commodities. And markets in these work just fine. Some economists suggest that insider trading is good for public markets, because it disseminates information. (However fiduciary duties would still apply. But they would only allow the company to sue the vice president who told her golf buddy about the upcoming earnings, but could not sue the golf buddy.)
- LeafItAlone 2y ago
  >That's an illustration that insider trading law in the US is not supposed to protect the public. From [0]: >Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the SEC has treated the detection and prosecution of insider trading violations as one of its enforcement priorities. So it _kinda_ is supposed to protect the public. 0. https://www.investor.gov/introduction-investing/investing-basics/glossary/insider-trading https://www.investor.gov/introduction-investing/investing-ba...
  - eru 2y ago
    Keep in mind that the legal theories of the SEC are distinct from what judges go by. See https://news.ycombinator.com/item?id=43662242 https://news.ycombinator.com/item?id=43662242
DeathArrow 2y ago
Well if CEO X and his deputy Y pass me on the street and they are overly excited or overly depressed, and I overhear what they talk and I buy some options, does it mean I break the law?

eru 2y ago

Insider trading in the US is more about misappropriating information that belong to a party you have fiduciary duties to, not so much about harm to the public. For example, imagine you are working for Warren Buffet and you learn that he has quietly bought some stocks and next weeks he's going to announce that. Assume that this announcement will reliably make the stock trade up. If you trade on that information, that's insider trading by US laws. However, now imagine that you are Warren Buffet. You just quietly bought some stock, and you plan to announce that fact next week. If you trade on that information about your intentions, that's not insider trading by US law: you are allowed to trade on your own private intentions and information. Notice that from the point of view of the anonymous counter party trading with you on the stock exchange, both situations look exactly the same. That's an illustration that insider trading law in the US is not supposed to protect the public. (At least not originally.) So making insider trading legal in the US wouldn't make the general public any worse off. Of course, IANAL applies. The above explanation is mostly paraphrased from Matt Levine's Money Stuff.

dataflow 2y ago
> Notice that from the point of view of the anonymous counter party trading with you on the stock exchange, both situations look exactly the same. [...] So making insider trading legal in the US wouldn't make the general public any worse off. Eh? If nothing else, doesn't it magnify the public's risk beyond whatever impact Buffet could have on his own? How can you possibly claim there is no difference? You might as well say: imagine you secretly give another country nuclear weapons, and assume that that country plans to use them. Now imagine you plan to use them for the same purpose yourself. From the viewpoint of the public, the situation is exactly the same. So nuclear proliferation wouldn't make the general public any worse off. Or imagine the president picks a random person by lottery every day to run the country while he goes to play golf. The president can take the same actions himself, so from the standpoint of the general public, nobody would be worse off.
- eru 2y ago
  > Eh? If nothing else, doesn't it magnify the public's risk beyond whatever impact Buffet could have on his own? How can you possibly claim there is no difference? Let me be more explicit: Warren Buffett usually doesn't physically execute his own trades. So the only difference between the two scenarios I outlined is that in the second one Warren Buffett tells you (as his employee) to trade. In the first one, you trade without him telling you to do so. But it's the same person doing the trades in either scenario. > Or imagine the president picks a random person by lottery every day to run the country while he goes to play golf. The president can take the same actions himself, so from the standpoint of the general public, nobody would be worse off. Sortition might actually be a good idea. https://en.wikipedia.org/wiki/Sortition https://en.wikipedia.org/wiki/Sortition
  - dataflow 2y ago
    You completely missed the point. It had nothing to do with who is executing the trades. >> If nothing else, doesn't it magnify the public's risk beyond whatever impact Buffet could have on his own? I am saying that when you let others pull the same trick in addition to Buffet himself, they can now bring their own additional funds to play with -- meaning they can make more trades and cause even more damage than Buffet could inflict on his own. This clearly enlarges the blast radius and allows more harm to the public than Buffet could cause with his own funds. It is ludicrous to close your eyes and suggest the situation is no different, just like it is by suggesting that there's no difference between one country having nukes vs. N of them having them. Heck, the fact that Warren Buffet is used as the example here instead of some random John Doe makes it clear how intentionally ridiculous the example is: for this to even pass the laugh test and obscure the reality of the situation, you have to pick one of richest people of all time, so that even aggregating a thousand other random strangers' funds together would still miss his purchasing power by multiple orders of magnitude. Why don't you start with someone poor instead of Buffet, then add Buffet to the equation, then try to claim that bringing the billionaire into the equation makes no difference, rather than the other way around?
    - eru 2y ago
vanviegen 2y ago
Insider trading around Warren Buffett seems like a really odd example. More typical would be company employees knowing the quarterly results before they are published. And there, it's easy to see how the law is protecting the public by leveling the playing field.
- eru 2y ago
  Even in your example the law ain't leveling the playing field: the company is allowed to trade on its quarterly earnings ahead of publishing them.
- wahern 2y ago
  Technically the law is protecting the share holders. Legal scholars, regulators, and even judges have continually tried to push the fraud-on-the-market theory of insider trading, but IIRC it's been firmly rejected by SCOTUS multiple times. There are statutes where the fraud-on-the-market principal pertains, but for your typical insider trading case predicated on Securities Exchange Act jurisprudence, it doesn't fly. Courts have said it would sweep far too broadly and significantly expand the scope of criminal liability (e.g. end up in prison for trading on something you overheard at the coffee shop). As insider trading law has been largely constructed by the courts (the statute its rooted in says nothing about "insider trading"), Congress would have to be explicit about a further expansion of criminal liability.
  - eru 2y ago
    Yes. And there's also no bans on equivalent 'insider trading' for foreign exchange nor commodities. And markets in these work just fine. Some economists suggest that insider trading is good for public markets, because it disseminates information. (However fiduciary duties would still apply. But they would only allow the company to sue the vice president who told her golf buddy about the upcoming earnings, but could not sue the golf buddy.)
LeafItAlone 2y ago
>That's an illustration that insider trading law in the US is not supposed to protect the public. From [0]: >Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the SEC has treated the detection and prosecution of insider trading violations as one of its enforcement priorities. So it _kinda_ is supposed to protect the public. 0. https://www.investor.gov/introduction-investing/investing-basics/glossary/insider-trading https://www.investor.gov/introduction-investing/investing-ba...
- eru 2y ago
  Keep in mind that the legal theories of the SEC are distinct from what judges go by. See https://news.ycombinator.com/item?id=43662242 https://news.ycombinator.com/item?id=43662242

DeathArrow 2y ago

Well if CEO X and his deputy Y pass me on the street and they are overly excited or overly depressed, and I overhear what they talk and I buy some options, does it mean I break the law?