Yeah, I know: It takes all the sport out of the stock market, levels the playing field, means you can’t cheat, etc, but why on Earth would you want a level playing field in business? I mean, I stay away from casinos and limit my “gambling” to games with drunken salesmen, where the odds are in my favor whatever the game because they are drunk. So why can I not use any advantage in the Market?
This went from a philosophical question to a real one Friday when I learned I was being transferred to a department that works with other companies as they do stuff called “murders and executions” or something; I wasn’t really paying attention. My reactions were, in order, “Great! Maybe more pay,” “No more Scottish housewives, just talking to people I used to work with all the time,” and, finally, “Wait a second, I could misuse this information.” Yes, I grow old and slow to think of that last, but I’ll genuinely miss the gentle coo of an Aberdeen gran as she tells me to sod off.
I have no money to invest and no desire to spend my golden years in the mens’ wing of the Martha Stewart Federal Prison so this is still a philosophical question, but maybe I’ve spent too long in Chicago and my normally strong moral compass is spinning like I am lost in the Bermuda Triangle, so please set me straight: Why is it wrong to use information that other people don’t have to make money in the Market, and how do people without inside information make money on Wall Street?
We can potentially make money from any swing in the market. Volatility is an opportunity. If the price is up only temporarily, and we know it’s temporary, we can sell now. If the price is down sharply, but again only temporarily, we can buy now. So upper management, given the ability to trade without restriction, might have an incentive to increase market volatility. For an exaggerated example, imagine this from the CEO:Monday: Tough break, folks. There will be a massive recall because our product gives cancer to kittens. Looks like profits will be down next quarter.
Tuesday: Good news, everyone! The product only gives cancer to tyrannical despots in war-ravaged countries. We expect exports to be strong to those countries in the coming months, resulting in record-breaking revenues.
Wednesday: Ah, bad news again. Every computer in our business went down simultaneously. We lost all data and backups.
Thursday: Although yesterday’s announcement was faithfully based on the information we had available at the time, and represented in no way any intent to deceive, it turns out that all our computers are working again. Probably just some prankster in the IT department! By the way, our computer folks tell us inventory controls have never been more precise, resulting in a cumulative savings to our company of millions of dollars over the previous fiscal year. Things are really looking up for this company!Buy, sell, buy, sell. It doesn’t matter what the price should be, if you can influence where it goes. That sort of volatility isn’t good for anyone else.
This is a complex topic. There are probably lots of other arguments out there, but that at least is one of them, for whatever it’s worth.
I thought it was because the people who’s money you’re taking in the rigged game, aren’t other people knowingly playing the same rigged game as you. They’re teachers and plumbers and widows who stand no chance of competing effectively with you and your insider information, but they’re the people from whom the bulk of the money in the stock market comes from, in the form of pension funds and IRAs and 401Ks and whatnot. If insider trading was allowed, and they knew it, they’d keep that money out, which would starve the stock market of capital.
In other words, preventing insider trading is a requirement of opening it up to the larger pool of capital that makes it better for everyone involved. You may have an immediate incentive to act on insider information, but exercising it comes at the cost of the health of the larger market, and rationally, you should recognize that and abstain.
Insider trading is theft, and it’s bad for the economy. I would never invest money in the stock market under circumstances in which it was legal for a company I have part ownership of to lie to me.
I think they said something about them in Blazing Saddles.
Okay, maybe my question expands to: Why would somebody invest in a company without doing their due diligence and finding out everything about the company they can before investing a dime? I assume the information for which I will be privy will also be known to every two-bit blogger and business magazine because they aren’t paying me enough to buy the silence of a citizen less upstanding than I.
Thinking more, I’ll probably learn tomorrow how I will only learn one side of the deal, and in only a general way, but at least I could be Ivan Boesky in my mind for a weekend. sigh Had a dog as a kid named after Billie Sol Estes. I shoulda seen this coming.
It isn’t all illegal. In order to [del]allow financiers to blatently steal money[/del] aid in the enforcement of SEC regulations, most insider trading is only a civil matter. Martha Stewart crossed into criminal territory by committing perjury, not for original insider trading.
Ideally, market prices should reflect the underlying value as accurately as possible. In order to do this, participants need to have information.
But true information is extremely costly to gain. It’s a burden. What you’re asking, essentially, is for each potential trader to independently do the research necessary to make informed choices. But this is obviously wasteful, because each player is doing the exact same work that everyone else is doing, which means all this effort in society is being used to gain information that has already been produced elsewhere.
To streamline the process, and reduce the burden on gaining access to information, there are certain rules. Ideally, these rules would make it so that the public information is as accurate as possible. Traders all have access to accurate information, and then make their trading choices. Rather than have the wastefulness of each player doing the diligence on their own, repeating the effort of others, we can do it once, together. This is the general spirit of the insider trading laws. It’s intended to create that basic foundation of trust in public information, to save people unnecessary burdens. If people don’t have to worry about the CEO manipulating public information, they might be more likely to invest.
This is potentially very important.
If we insist that there should be a fundamental information burden to investment, if we insist that absolutely everybody must pay a large price up front to inform themselves on even the most basic issues, then you automatically exclude some people from the market. That might mean you dry up part of the source of investment funds that companies need in order to expand and create more innovations. Hardly ideal. For many, this sort of thinking makes a very convincing case against the sort of private information problems that insider trading represents.
Because someone gives you a tip that you don’t think everyone else knows.
Because you don’t want to miss out on the next big boom.
Because you heard that you should have some money in stocks, but you don’t really know shit about the stock market. Still, you’re smarter than the average schmo, right?
The point is insider trading is not the equivalent of gambling with drunk guys. Everyone knows the rules of gambling and the effects of alcohol. You’re just competing against each other on the basis of who can handle this common knowledge better.
Insider trading is not based on being smarter or more efficient or any other quality. It’s just you know a secret other people don’t. And it’s effective - if you allow people to trade based on secret information they’ll usually beat people who don’t know the secret.
So the market will no longer be controlled by factors like intelligence or efficiency or customer service. It’ll be controlled by who has access to the most secrets. And while things like intelligence, efficiency, and customer service bring benefits to society as a whole, secrecy does not.
Or maybe they are momentum investors rather than value investors: they think they know which way the future news will blow. Let other people conduct due diligence. Also what John Mace said.
IMHO, we know more about stock markets than we did in 1925 but less than what we will ultimately know in important ways. Which is sort of interesting to the extent that the market is wholly a human invention.
And still a crapshoot for many of the players, the butchers and bakers and candlestick makers who rely on common, and elderly, knowledge to make their decisions. The momentum investors you mentioned.
I believe you’d get some arguments about that here. IRL I cover up my schmoness with big words and an unplaceable accent. Here I use the same big words but people know I’m using them incorrectly and nobody can hear that I speak some Minnesota, some Virginia, and some Suburban Chicago. Had a boss who thought I sound vaguely British.
I don’t see the connection – how does your transfer clue you that your company’s stock is about to go up/down? Or, is it that your new position gives you inside information on those other companies you work with?
I don’t get it. What is it that you (the OP) do that you need to worry about insider trading all of a sudden but don’t know why it’s illegal?
Actually, some economists don’t think it should be illegal. That those with insider information should simply be allowed to trade on it and the market price will ultimately contain all information available about a stock. Theoretically, in a completely efficient market no one would make any money since any information about a stock is immediately available to all investors simultaneously.
The main argument against insider trading is that it creates a conflict of interest.
When I used to work in the Big 4, Compliance made a huge deal about what stocks you could and could not own. As a management consultant, we are supposed to be working in the interests of the client. However owning a position in a client’s company might entice me to provide advice that serves the interest of my position, instead of the client (for example, giving shitty advice and then shorting the stock). Now it’s not as big a deal for Joe Analyst nobody making $50 out of college, running Excel models and making Powerpoint decks. But a partner with a lot more money to invest who has the ear of the CEO is in a position where conflicts become potentially more serious. Thanks to Sarbanes Oxley, we typically couldn’t have consulting clients that were also clients of the Audit or Tax practice.
I don’t think those things have that much to do with the market. Efficiency and customer service may have more to do with how quickly trades can be executed. But intelligence is only as good as the data you have at your disposal to analyze. In reality, once you trade on your insider information, it has essentially become public. Not the particulars of the information per se. But the fact that the trade has happened sends a signal to other investors.
Well, some people are stupid, but we don’t regulate that. Seriously, the assumption that all of the information you’d want would be made available to you without the kinds of disclosure laws we have is a joke. What we’re regulating is the company actively choosing to lie to you, the (potential) stockholder. Not just big fat lies like Hellestal gave examples of, but simple things like hiding real expenses or hiding profit losses. So we require them to actually tell the truth to the public. This sounds like an obvious thing, the sort of information that no one could hide, but when things are buried in spreadsheets in accounting departments, it gets extraordinarily difficult to track down even if you’re the SEC with trained accountants and lawyers and full access to the company’s accounting books. Every two-bit blogger doesn’t have that kind of access, let alone the time or expertise to correctly assess what the hell’s going on. None of that is about insider trading per se-- that’s about financial disclosure laws.
And if the company executives get to act on that information before you the (potential) stockholder do, then they can simply invest or divest immediately before they admit to you that they suck at their jobs and they’ve crashed the stock price into the ground. That’s why we prohibit insider trading. What we’re prohibiting is not executives making money because they know their company very well, but rather making money off the difference in time between when they learn something and when you learn it.
No, because having all the information anyone else has on the company still does not equate to being able to accurately predict its future success, which is always dependent in part on unpredictable factors. Some investors still would make/lose a lot more money than they expected – as gamblers do.
Pst: murders and executions might mean mergers and acquisitions. Probably not though, at least insofar as we extend some constructive ambiguity to a fellow poster. At any rate, the SEC takes a close interest in such matters.
Why do you care about any of the above? Why do you want legislators worrying about it, and regulatory agencies set up and funded by your tax dollars, and armed enforcement bodies of the law at the ready (also funded by your tax dollars), to deal with it?
Why do you care? I’m not joking. I’m serious. Why do you care?
