Phil/Insider trading

[Fidelio]

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Apologies to @iacas, he said this was off-topic for this thread so I'll respect that. I'd welcome a discussion about this in the Grill Room, if the OP is sufficiently motivated. It's an incredible assertion to view insider trading as a victimless crime.

@iacas @ScouseJohnny

If Phil Mickelson has strong reason to believe  that a company is going to have a bad quarter or a drug is going to fail FDA approval, he would short the stock.  His selling would depress the stock price. A person who was  adamant about  getting long would be filled at a better price so when the bad quarter or FDA failure does get announced they will lose slightly less money. If Phil Mickelson and others with this knowledge trade in enough size their selling could signal to others that something is potentially wrong which might help them avoid buying the stock. That selling (as well as reduced buying) also cushions the blow for when the negative event does happen. There won't be as large of a gap down surprise.

 

Here are some random quotes from economists. 

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Nobel Prize-winning economist Milton Friedman 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." 

Dean emeritus Henry Manne of the George Mason University School of Law and the author of Insider Trading and the Stock Market, said in a radio interview that insider trading "helps to move the price of a share to its 'correct level'" and trades made using privileged information provide an "actual reflection of what's going on" with a particular stock. 

Economist Donald Boudreaux, "Perhaps the greatest benefit of insider trading is that it causes equity prices to disclose all relevant information as quickly as possible."
 

 

http://www.econlib.org/library/Enc/InsiderTrading.html

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Empirical research generally supports skepticism that regulation of insider trading has been effective in either the United States or internationally, as evidenced by the persistent trading profits of insiders, behavior of stock prices around corporate announcements, and relatively infrequent prosecution rates (Bhattacharya and Daouk 2002; Bris 2005)

Several researchers have proposed that market professionals (notably, securities analysts) be allowed to trade on inside information (Goshen and Parchomovsky 2001). 

 

 

Edited June 20, 2018 by Fidelio

[iacas]

The problem with your quotes is that everyone would have to know these things were taking place.

Those aren't "random quotes" they're outlier quotes. And the only part of your second quote is "several have proposed that they be allowed to trade on insider information." It doesn't actually share the reasons why.

Phil MIckelson wasn't an insider but he was given a tip by one, and thus given an unfair advantage over the rest of the market - anyone who didn't have that information. That's why it remains illegal - insider information gives advantages to people who are insiders, thus disadvantaging outsiders.

https://www.hg.org/article.asp?id=31598

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The first thing that you should know which might surprise you is that not all insider trading is illegal. The illegal variety of insider trading occurs when a securities transaction (i.e., purchase or sale of stocks) is influenced by knowledge that only a small group of people inside of the company whose stocks are being traded would know about. This obviously gives the insider trader an unfair advantage that allows them to profit from information about a potential up or down tick in a company's trading value before others in the market.

http://business.time.com/2013/07/26/why-is-insider-trading-even-illegal/ says:

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In fact, there are large number of professional economists and legal theorists — albeit generally of the libertarian persuasion — who feel that insider trading shouldn’t be illegal at all.

But goes on to say:

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These arguments are not new. Ever since 1934, when insider trading became illegal in the United States, theorists have argued about the merits of such restrictions. But what may come as a surprise to many is that even though insider trading has technically been illegal since the 1930’s, regulators have only been enforcing the law with vigor for the past 30 years.  That changed radically in the 1980s, when several new laws were passed to stiffen penalties for insider trading, and regulators started bringing many more cases against Wall Street.

So why was there a sudden shift against insider trading in the 1980s, and what is the rationale behind these laws? While it’s true that, as Bandow argues, insider trading deprives markets of some pertinent information, allowing insider trading would weaken other pillars of a modern securities market.

This is what I'm saying, mostly:

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Second, insider trading most certainly puts the average investor at a disadvantage. If the nonprofessional investor feels that he can’t participate in the markets without getting ripped off, he’ll also leave the markets.

Your argument boils down to the old "more information will lead to a better, more accurate market" view, but if insider trading becomes legal, that information will possibly be kept more bottled up. There will still be insiders, and information will still be restricted because now people can legally profit from keeping it to themselves.

The average investor will leave the markets, knowing that they never have fair access to the insider info, and when they do get it it's way too late to act upon it. This will lead to a whole bunch of people with inside info, but only in their segments of the realm, and trading as a whole would slow. In a world of all insiders, if you're eager to sell off a stock, one could safely assume it's because you know something they don't, and who then would want to buy the stock?

The "information will lead to a better market" argument makes some sense, but at the same time, that's not how it would shake out at all.

Phil abused his position as a guy with access to insider information and likely should have gone to jail like Martha Stewart.

I'm not an economist. I'm not a player in securities or stocks or bonds. I'm just me, and I know very little about this, but that represents my opinion above, and it's not difficult to search the web for arguments in favor of keeping insider trading laws on the books, either.

[Fidelio]

2 hours ago, iacas said:

The average investor will leave the markets, knowing that they never have fair access to the insider info, and when they do get it it's way too late to act upon it. This will lead to a whole bunch of people with inside info, but only in their segments of the realm, and trading as a whole would slow. In a world of all insiders, if you're eager to sell off a stock, one could safely assume it's because you know something they don't, and who then would want to buy the stock?

The "information will lead to a better market" argument makes some sense, but at the same time, that's not how it would shake out at all.

 

 

There are obviously endless articles and opinions on both sides.  Free market economists are pretty unanimous in favoring eliminating insider trading. Other philosophers have differing views.  I have no idea how the average investor would respond. You could easily make the opposite argument that the markets will be more transparent and the average investor should feel more confident because everything will baked into price. Even if insiders withheld information (which is illegal) that information would only be valuable if someone acted on it, which if they did,  would make prices more correct.   Most people who favor expanding insider trading still want to force anyone who acts on it to disclose it.

Either way that argument won't be settled here. Ultimately it is a moral issue to me. If you possess information, that is your property. You should be able to do as you please with your property as long as you don't harm someone else in a free society. If someone willingly trades with you, that is not harm.  Insider trading is similar to why drug laws and laws against prostitution are wrong. Neither one has a direct victim. When you have willing buyers and sellers on both sides, there isn't a role for government in my view. Frankly, I think they are unconstitutional.  I don't think Phil is a moral crusader, but I view him as a reduced version of Marc Rich, which is to say a quasi-hero. I don't break bad laws, but if other people do (like evade taxes), that wouldn't be a black mark against their character to me personally.

Edited June 24, 2018 by Fidelio

[iacas]

1 minute ago, Fidelio said:

Free market economists are pretty unanimous in favoring eliminating insider trading.

Not from what I've read.

It's not a victimless crime, as you said. The victims are those without the same knowledge. The victims are the "outsiders."

1 minute ago, Fidelio said:

You could easily make the opposite argument that the markets will be more transparent and the average investor should feel more confident because everything will baked into price.

I don't think you could "easily" make that argument.

1 minute ago, Fidelio said:

Even if insiders withheld information (which is illegal) that information would only be valuable if someone acted on it, which if they did, would make prices more correct.

Only after the fact - after they benefited massively from their insider knowledge. Screwing those who didn't have that information. The prices are "correct" now after the information is released, too.

1 minute ago, Fidelio said:

Either way that argument won't be settled here.

No shit.

1 minute ago, Fidelio said:

Ultimately it is a moral issue to me. If you possess information, that is your property. You should be able to do as you please with your property as long as you don't harm someone else in a free society.

You are harming others. The rules are established for a reason.

1 minute ago, Fidelio said:

I don't think Phil is a moral crusader, but I view him as a reduced version of Marc Rich, which is to say a quasi-hero. I don't break bad laws, but if other people do (like evade taxes), that wouldn't be a black mark against their character to me personally.

Oooooookaaaaaaay.

[Fidelio]

31 minutes ago, iacas said:

Not from what I've read.

 

I can't find an example of a free market economist in favor of insider trading laws. Feel free to link to one. I would be curious to find just one. There has to be but I can't find him or her.

Also, no one being screwed. Every time you buy a share of something, you are essentially saying the other person is an idiot for selling to you. Trading is based on asymmetries.  James was a solid day trader. Here is him just saying what I said with different words. 

https://www.marketwatch.com/story/why-insider-trading-should-be-legal-2011-05-17

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Some people say insider trading is a victimless crime and that’s why it should be legal. Like most people with opinions, these people are completely wrong. Not only does insider trading have no victims, it actually helps people. So we have on the books a crime that helps people. It’s like jailing people who cure brain cancer. 

I’ll give you a simple example. Let’s say I know I want to buy stock XYZ. I’ve been saving up money from my newspaper route because I did my research and I think XYZ is a great company. Let’s say there’s someone else, some nefarious insider, who knows that XYZ is a fraud. We do the dirty deed together: he sells me his shares. Then the XYZ fraud comes out, the stock goes to zero and I lost all my money I had put in the stock and the guy who sold me his shares got away with the whole thing. He’s rich now. He’s on the beach. Girls in bikinis are refilling his drinks. He never has to move off that beach chair again.

Who is the victim? Well, you might think: I am. I just lost all or most of the money I had put on the stock. But I should be thanking the guy who sold me his shares. How come? Well, I wanted to buy that stock anyway. If he hadn’t come along and sold those shares to me, I would have paid a higher price. If I paid more for the stock, I would have lost more money. That’s common sense. The more insiders selling me shares of the fraud, the less I would lose.

In fact, I want all the insiders to sell me their shares because they all know it’s a fraud. I want the insiders competing against each other to sell me their share so the price goes lower and lower, so I and the rest of the people who are buying XYZ (because of their new space engine that’s powered by spiderwebs) will pay lower and lower prices.

 

 

Edited June 24, 2018 by Fidelio

[iacas]

Just now, Fidelio said:

I can't find an example of a free market economist in favor of insider trading laws. Feel free to link to one. I would be curious to find just one. There has to be but I can't find him or her.

I'm not all that interested in this. I've given my opinion, which mirror the opinions of many, and I disagree with yours.

I disagree that "nobody is getting screwed."

Beyond that… meh.

[upndown21]

51 minutes ago, Fidelio said:

I can't find an example of a free market economist in favor of insider trading laws. 

Also, no one being screwed. Every time you buy a share of something, you are essentially saying the other person is an idiot for selling to you.

 

 

1. If a free market economist was in favor of insider rIles then they would not be a free market economist.

2. When you have material non-public information you are in fact screwing someone who does not have the same information.

3. The idiot comment is crazy. People have different risk tolerance and objectives. If I bought FB at $30 and sell it to you at $200 perhaps I wet my beak enough and rather book a gain than take more risk of holding a mature position. Plus there are market makers that provide liquidity in securities so when you buy your not necessarily buying from Joe Schmoe down the street. 

[Fidelio]

1 hour ago, upndown21 said:

2. When you have material non-public information you are in fact screwing someone who does not have the same information.

 

I don't agree and there are no shortage of people with  Nobel Prizes in Economics who also strongly disagree.  I believe insider trading helps the people on the other side of the transaction as  the article I linked to expresses, though that isn't the reason I support eliminating those laws. It is just a benefit.

 

[iacas]

5 hours ago, Fidelio said:

I don't agree and there are no shortage of people with  Nobel Prizes in Economics who also strongly disagree.  I believe insider trading helps the people on the other side of the transaction as  the article I linked to expresses, though that isn't the reason I support eliminating those laws. It is just a benefit.

So there's really no discussion to be had here.

Cool. 😜

[upndown21]

On 6/24/2018 at 1:42 PM, Fidelio said:

I don't agree and there are no shortage of people with  Nobel Prizes in Economics who also strongly disagree.  I believe insider trading helps the people on the other side of the transaction as  the article I linked to expresses, though that isn't the reason I support eliminating those laws. It is just a benefit.

 

Real world and the academic world are two different places. 

Let's play a game. The bet is $10,000. We guess how many jelly beans are in a container. Closest to the correct number wins the bet. I get to count the jelly beans before guessing. Want to play?