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I'd never thought about this line of reasoning but it's an interesting hypothetical question. The Wikipedia article on insider trading is surprisingly informat

I'd never thought about this line of reasoning but it's an interesting hypothetical question. The Wikipedia article on insider trading is surprisingly informative on the counterarguments: "Milton Friedman, laureate of the Nobel Memorial Prize in Economics, said: "You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that." Friedman did not believe that the trader should be required to make his trade known to the public, because the buying or selling pressure itself is information for the market" ... "Legalization advocates also question why "trading" where one party has more information than the other is legal in other markets, such as real estate, but not in the stock market. For example, if a geologist knows there is a high likelihood of the discovery of petroleum under Farmer Smith's land, he may be entitled to make Smith an offer for the land, and buy it, without first telling Farmer Smith of the geological data.[2] Nevertheless, circumstances can occur when the geologist would be committing fraud if, because he owes a duty to the farmer, he did not disclose the information; for example, if he had been hired by Farmer Smith to assess the geology of the farm." ... "There are very limited laws against "insider trading" in the commodities markets if, for no other reason than that the concept of an "insider" is not immediately analogous to commodities themselves (corn, wheat, steel, etc.). However, analogous activities such as front running are illegal under US commodity and futures trading laws. For example, a commodity broker can be charged with fraud by receiving a large purchase order from a client (one likely to affect the price of that commodity) and then purchasing that commodity before executing the client's order to benefit from the anticipated price increase." It doesn't feel that contradictory for me to believe insider trading should be a illegal in equities but legal in commodities, if only because of the externalities involving trust in corporate governance, the conflicting incentives (if the CEO can short his own stock, that creates some perverse incentives). But there definitely a pro-market-signalling argument to be made WRT to the OP's article.

MartinCron 13y ago
There are a lot of disclosure laws in real estate, though. When you go to sell a house (in my state, anyway), it is against the law to say that the basement has never flooded if it has flooded.
- vonmoltke 13y ago
  I should hope that is illegal to lie during such a transaction. Real estate disclosure laws don't cover that, though. They cover information you are required to volunteer to serious buyers. In the absence of such laws, you would not need to say anything about the state of your basement unless the buyer specifically asked.
  - MartinCron 13y ago
    Exactly. And that's why we have those disclosure laws, to make it against the law to take advantage of the fact that a buyer didn't think to ask a particular question. You should be able to buy a stock without having to ask the seller "Hey, did you just get a heads up from the CEO that this is going to tank?"
  - rhizome 13y ago
    There are lies of commission, but also lies of omission.
conanbatt 13y ago
The thing with asymmetric information is that it quickly becomes a fraudulent behavior, i.e. 2008 mortgage crisis. When you know something the other party doesnt, and specially if that party doesnt have access to that information, its hard to see that situation as not abusive. The game doesnt require cunning to be profitable to all parties, and information asymmetry is a tool to profit from a zero-sum like mindset. On the other hand, the stock market operates vastly on insider trading, because even though its a rule, its very hard to enforce.
eli_gottlieb 13y ago
"Milton Friedman, laureate of the Nobel Memorial Prize in Economics, said: "You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that." Friedman did not believe that the trader should be required to make his trade known to the public, because the buying or selling pressure itself is information for the market" Friedman is full of crap. Buying or selling pressure are indication that someone thinks the market will move in a certain direction. They do not indicate which someone, why they believe that, or how confident they are in their prediction. Thus, even if we assume all market actors are perfectly rational with respect to the information they possess (which is never true), a mere short-term price shift due to buying or selling activity, even when the quantity of the activity (units bought/sold and at what prices) is made public, does not actually give us information about the beliefs and confidences of the person buying/selling. If I want to treat sales as information and use them to assess where I think prices are going to go, I have to have all information available about the sales. I can't even estimate other people's beliefs about the sales without knowing about what transactions they make and what their portfolio looks like. Unless someone's got some kind of super-Aumannian probability math for applying to imperfectly rational agents of whom we have imperfect knowledge, which we can use to make reliable estimates of probability and financial value despite all those levels of imperfection. EDIT: OW, my brain hurts, and I feel like I need to go eat an advanced probability textbook.
- baddox 13y ago
  I don't see your point. Friedman wasn't saying that the market would know that a specific executive was selling or buying stock, but rather, that the very act of anyone selling or buying stock by definition affects the price of the stock, and that it's better to allow people with the most information about a stock to influence the market.
  - rtpg 13y ago
    This didn't stop the huge asset bubbles that formed due to the opaque markets of derivatives from forming. Buying and selling pressure don't communicate things like size very well, but its often an extremely important point that we need to consider when thinking about the health of a market.

MartinCron 13y ago

There are a lot of disclosure laws in real estate, though. When you go to sell a house (in my state, anyway), it is against the law to say that the basement has never flooded if it has flooded.

vonmoltke 13y ago
I should hope that is illegal to lie during such a transaction. Real estate disclosure laws don't cover that, though. They cover information you are required to volunteer to serious buyers. In the absence of such laws, you would not need to say anything about the state of your basement unless the buyer specifically asked.
- MartinCron 13y ago
  Exactly. And that's why we have those disclosure laws, to make it against the law to take advantage of the fact that a buyer didn't think to ask a particular question. You should be able to buy a stock without having to ask the seller "Hey, did you just get a heads up from the CEO that this is going to tank?"
- rhizome 13y ago
  There are lies of commission, but also lies of omission.

conanbatt 13y ago

The thing with asymmetric information is that it quickly becomes a fraudulent behavior, i.e. 2008 mortgage crisis. When you know something the other party doesnt, and specially if that party doesnt have access to that information, its hard to see that situation as not abusive. The game doesnt require cunning to be profitable to all parties, and information asymmetry is a tool to profit from a zero-sum like mindset. On the other hand, the stock market operates vastly on insider trading, because even though its a rule, its very hard to enforce.

eli_gottlieb 13y ago

"Milton Friedman, laureate of the Nobel Memorial Prize in Economics, said: "You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that." Friedman did not believe that the trader should be required to make his trade known to the public, because the buying or selling pressure itself is information for the market" Friedman is full of crap. Buying or selling pressure are indication that someone thinks the market will move in a certain direction. They do not indicate which someone, why they believe that, or how confident they are in their prediction. Thus, even if we assume all market actors are perfectly rational with respect to the information they possess (which is never true), a mere short-term price shift due to buying or selling activity, even when the quantity of the activity (units bought/sold and at what prices) is made public, does not actually give us information about the beliefs and confidences of the person buying/selling. If I want to treat sales as information and use them to assess where I think prices are going to go, I have to have all information available about the sales. I can't even estimate other people's beliefs about the sales without knowing about what transactions they make and what their portfolio looks like. Unless someone's got some kind of super-Aumannian probability math for applying to imperfectly rational agents of whom we have imperfect knowledge, which we can use to make reliable estimates of probability and financial value despite all those levels of imperfection. EDIT: OW, my brain hurts, and I feel like I need to go eat an advanced probability textbook.

baddox 13y ago
I don't see your point. Friedman wasn't saying that the market would know that a specific executive was selling or buying stock, but rather, that the very act of anyone selling or buying stock by definition affects the price of the stock, and that it's better to allow people with the most information about a stock to influence the market.
- rtpg 13y ago
  This didn't stop the huge asset bubbles that formed due to the opaque markets of derivatives from forming. Buying and selling pressure don't communicate things like size very well, but its often an extremely important point that we need to consider when thinking about the health of a market.