# Why is insider trading illegal? **URL:** \ **Category:** Great Debates\ **Created:** [April 15, 2013, 12:01am UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731 "2013-04-15T00:01:15Z")\ **Posts on this page:** 20\ **Page:** 2
**Author:** ![Little\_Nemo](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/little_nemo/32/3120_2.png) [@Little\_Nemo](https://boards.straightdope.com/u/Little_Nemo)\ **Post date:** [April 15, 2013, 4:34am UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/21 "2013-04-15T04:34:24Z")
> [@msmith537](#): > > 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. The result becomes obvious. But not the cause. People can see I sold my holdings in a certain company but they don’t know why. Did I do it because of my insightful analysis of publically known economic trends or did I do it because I got inside information from a board member? ---
**Author:** ![appleciders](https://avatars.discourse-cdn.com/v4/letter/a/85f322/32.png) [@appleciders](https://boards.straightdope.com/u/appleciders)\ **Post date:** [April 15, 2013, 5:02am UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/22 "2013-04-15T05:02:10Z")
> [@IdahoMauleMan](#): > > A serious question here for you… > > 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? Because a fair amount of my retirement savings is tied up in the stock market. It’s diversified and mostly in some very safe places, but I still worry a little. The SEC and other such agencies help prevent crap like Enron that could wipe out my savings. ---
**Author:** ![wonky](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/wonky/32/393_2.png) [@wonky](https://boards.straightdope.com/u/wonky)\ **Post date:** [April 15, 2013, 5:10am UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/23 "2013-04-15T05:10:17Z")
Conflict of interest and trust in the market. If people won’t put their money in the market because they think it’s rigged, then bad things happen. And if people in positions of trust have a reason to abuse the trust, they have a conflict of interest. So, it’s a protection for the market as a whole, and it’s a protection for the shareholders of individual entities within the market. ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [April 15, 2013, 5:50am UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/24 "2013-04-15T05:50:12Z")
> [@appleciders](#): > > Because a fair amount of my retirement savings is tied up in the stock market. It’s diversified and mostly in some very safe places, but I still worry a little. The SEC and other such agencies help prevent crap like Enron that could wipe out my savings. The SEC didn’t do jack-shit to prevent Enron from happening. In fact, the SEC did _nothing_ as Enron’s stock was tanking, primarily as a result of some basic research done by journalists operating of their own accord. They even had an SEC office co-located in the Enron building, if you can believe that. The SEC also regulated Bernie Madoff’s operation. Supposedly. I suggest you read the history of that affair, especially the part about how whistle blowers were sending them letters and they did nothing. You are deluding yourself if you think the SEC is protecting you from incidents like this. ---
**Author:** ![appleciders](https://avatars.discourse-cdn.com/v4/letter/a/85f322/32.png) [@appleciders](https://boards.straightdope.com/u/appleciders)\ **Post date:** [April 15, 2013, 6:57am UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/25 "2013-04-15T06:57:14Z")
I disagree. These things are the exception, not the rule. Without the SEC they’d be the rule. What you’re suggesting is analogous to saying that because murders still happen, we shouldn’t bother having cops. ---
**Author:** ![Throatwarbler\_Mangrove](https://avatars.discourse-cdn.com/v4/letter/t/8c91f0/32.png) [@Throatwarbler\_Mangrove](https://boards.straightdope.com/u/Throatwarbler_Mangrove)\ **Post date:** [April 15, 2013, 7:27am UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/26 "2013-04-15T07:27:37Z")
> [@dropzone](#): > > 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? 1. Your attitude is not uncommon in the world. Per wikipedia Japan only’ made it a crime in the 1980s, and IIRC Hong Kong is similar. 2. Laws get made because some influential people or group want them to be made. In this case the people who run stock exchanges thought that it would be beneficial to them that the stock market not be a complete free-for-all, because that way, more people would buy and sell stocks and pay more money in commissions. 3. If you take a step back, the stock market isn’t all of or even a very big part of the national economy of the US, and much less so in other countries. If you feel that the rules and regulations that the stock market has chosen to be governed by are too onerous, well no one is stopping you from finding someone who _doesn’t_ offer the disclosure or adhere to the rules on insider trading that the stock markets insist on to take your investment dollars. Think your next door neighbour is the next Steve Jobs? Give him all your money, no worries about insider trading there. So even if these rules were somehow economically inefficient, I don’t see any sort of natural-law reason why they SHOULDN’T exist. ---
**Author:** ![Measure\_for\_Measure](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/measure_for_measure/32/557_2.png) [@Measure\_for\_Measure](https://boards.straightdope.com/u/Measure_for_Measure)\ **Post date:** [April 15, 2013, 8:20am UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/27 "2013-04-15T08:20:05Z")
> [@IdahoMauleMan](#): > > A serious question here for you… > > 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? Here’s why you should care. If small investors believe that the stock market is largely a rigged casino (which it was arguably during the 1920s and is not today) then fewer will invest in it. Under those conditions, investment would still occur, but financing would be done through banks and bonds. That may not be a horrible thing actually. But it would be a different form of capitalism than the US has now, one closer to what Germany and perhaps Japan and South Korea have. [sort of a hijack]The SEC has curbed much of the most blatant financial nonsense (with exceptions of course - they dragged their feet with the Mohler Skycar for example) and pushed dubious practices into the land of the esoteric (think of derivatives, structured vehicles and very high frequency trading). But if the published numbers aren’t entirely transparent at least they are decipherable, something which they were not during the 1920s and are not today in the case of private companies (not that the latter is typically a problem). I’m a big supporter of requiring professionalism in financial reporting. [/sort of a hijack] ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [April 15, 2013, 1:27pm UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/28 "2013-04-15T13:27:23Z")
> [@appleciders](#): > > I disagree. These things are the exception, not the rule. Without the SEC they’d be the rule. What you’re suggesting is analogous to saying that because murders still happen, we shouldn’t bother having cops. Ah, yes. What we need is _more_ government oversight, not less. More enforcement authority. More rules. That will stop them. Buying or selling shares in a company is a purely voluntary activity, with incentiveson both sides to engage in honest activity. Neither side is being forced to do anything. Nobody is forcing you to buy stock in any company that you don’t trust. If you can’t honestly see the difference between that and a purely involuntary activity like murder, God help you. ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [April 15, 2013, 1:33pm UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/29 "2013-04-15T13:33:00Z")
> [@Measure\_for\_Measure](#): > > Here’s why you should care. If small investors believe that the stock market is largely a rigged casino (which it was arguably during the 1920s and is not today) then fewer will invest in it. Under those conditions, investment would still occur, but financing would be done through banks and bonds. That may not be a horrible thing actually. But it would be a different form of capitalism than the US has now, one closer to what Germany and perhaps Japan and South Korea have. > > [sort of a hijack]The SEC has curbed much of the most blatant financial nonsense (with exceptions of course - they dragged their feet with the Mohler Skycar for example) and pushed dubious practices into the land of the esoteric (think of derivatives, structured vehicles and very high frequency trading). But if the published numbers aren’t entirely transparent at least they are decipherable, something which they were not during the 1920s and are not today in the case of private companies (not that the latter is typically a problem). I’m a big supporter of requiring professionalism in financial reporting. [/sort of a hijack] Yes, but that presumes that trading in publicly listed companies is somehow supra-essential to natonal well-being, a positive externaility as it were. As you rightly point out above (which I expected from a smart cookie like you, M4M) there are many, many other ways to connect providers and recipients of captial other than the public markets. You’ve mentioned banks and bonds. Of course there are many other options such as VC, PE and private placements. Those occur with lots of regularity in today’s world and are as large, if not larger, than the public markets. Also, your assumption is that this externality is _so_ important, and so critical, that self-regulating measures would not spring up to ensure some level of fairness. That if millions of people wanting to invest in the market continued to get burned, year after year, by investing in unregulated companies there would be no incentive for either side, or a 3rd party agent like a licensing company, to do anything. It’s a well framed hypothesis. I’m just not buying it. ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [April 15, 2013, 1:34pm UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/30 "2013-04-15T13:34:34Z")
> [@Throatwarbler\_Mangrove](#): > > 1. Your attitude is not uncommon in the world. Per wikipedia Japan only’ made it a crime in the 1980s, and IIRC Hong Kong is similar. > > 2. Laws get made because some influential people or group want them to be made. In this case the people who run stock exchanges thought that it would be beneficial to them that the stock market not be a complete free-for-all, because that way, more people would buy and sell stocks and pay more money in commissions. > > 3. If you take a step back, the stock market isn’t all of or even a very big part of the national economy of the US, and much less so in other countries. If you feel that the rules and regulations that the stock market has chosen to be governed by are too onerous, well no one is stopping you from finding someone who _doesn’t_ offer the disclosure or adhere to the rules on insider trading that the stock markets insist on to take your investment dollars. Think your next door neighbour is the next Steve Jobs? Give him all your money, no worries about insider trading there. So even if these rules were somehow economically inefficient, I don’t see any sort of natural-law reason why they SHOULDN’T exist. I like you, ThroatWG. Come back and post more often. ---
**Author:** ![Cheesesteak](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/cheesesteak/32/3694_2.png) [@Cheesesteak](https://boards.straightdope.com/u/Cheesesteak)\ **Post date:** [April 15, 2013, 2:51pm UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/31 "2013-04-15T14:51:26Z")
> [@IdahoMauleMan](#): > > Buying or selling shares in a company is a purely voluntary activity, So is listing your shares on a public exchange. Don’t like the “no insider trading” rule, don’t list your shares publicly, problem solved. If you want to take advantage of publicly listing shares of your company for sale, you don’t get to fuck over the public by trading on information that you (as an insider) have refused to make available to them. ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [April 15, 2013, 2:59pm UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/32 "2013-04-15T14:59:05Z")
> [@IdahoMauleMan](#): > > Yes, but that presumes that trading in publicly listed companies is somehow supra-essential to natonal well-being, a positive externaility as it were. As you rightly point out above (which I expected from a smart cookie like you, M4M) there are many, many other ways to connect providers and recipients of captial other than the public markets. You’ve mentioned banks and bonds. Of course there are many other options such as VC, PE and private placements. Those occur with lots of regularity in today’s world and are as large, if not larger, than the public markets. > > Also, your assumption is that this externality is _so_ important, and so critical, that self-regulating measures would not spring up to ensure some level of fairness. That if millions of people wanting to invest in the market continued to get burned, year after year, by investing in unregulated companies there would be no incentive for either side, or a 3rd party agent like a licensing company, to do anything. > > It’s a well framed hypothesis. I’m just not buying it. The history of securities regulation in the US is pretty well documented. Sometimes, self-regulating mechanisms spring into being organically, and sometimes they don’t. In the case of the US securities market, they didn’t. The distinction between publicly traded securities and the “alternatives” you mention is that the latter invariably involve sophisticated investors, and thus inherently require less regulation. Hell, the whole point of a private placement is that you avoid SEC registration by carefully selecting sophisticated buyers. If what you want is a market that is only open to the savviest investor, that’s fine, but I don’t see why that would benefit anyone. ---
**Author:** ![IdahoMauleMan](https://avatars.discourse-cdn.com/v4/letter/i/71c47a/32.png) [@IdahoMauleMan](https://boards.straightdope.com/u/IdahoMauleMan)\ **Post date:** [April 16, 2013, 3:04am UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/33 "2013-04-16T03:04:30Z")
> [@Really\_Not\_All\_That\_Bright](#): > > The history of securities regulation in the US is pretty well documented. Sometimes, self-regulating mechanisms spring into being organically, and sometimes they don’t. In the case of the US securities market, they didn’t. > > The distinction between publicly traded securities and the “alternatives” you mention is that the latter invariably involve sophisticated investors, and thus inherently require less regulation. Hell, the whole point of a private placement is that you avoid SEC registration by carefully selecting sophisticated buyers. > > If what you want is a market that is only open to the savviest investor, that’s fine, but I don’t see why that would benefit anyone. You seem to believe that the only way that millions of small investors can be matched to willing recipients is via the benevolent hand of government intervention. There are new funding mechanisms popping up every day that match the two sides…both via P2P lending networks and crowdsourcing. The regulation that you so believe in is actually driving this innovation, since it makes it so costly and time-consuming for a public company to offer shares to the public. ---
**Author:** ![Really\_Not\_All\_That\_Bright](https://avatars.discourse-cdn.com/v4/letter/r/e8c25b/32.png) [@Really\_Not\_All\_That\_Bright](https://boards.straightdope.com/u/Really_Not_All_That_Bright)\ **Post date:** [April 16, 2013, 3:19am UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/34 "2013-04-16T03:19:43Z")
Did you quote the correct post? Yours doesn’t appear to have anything to do with what I posted. ---
**Author:** ![Eonwe](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/eonwe/32/240_2.png) [@Eonwe](https://boards.straightdope.com/u/Eonwe)\ **Post date:** [April 16, 2013, 5:33am UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/35 "2013-04-16T05:33:25Z")
> [@IdahoMauleMan](#): > > That’s why they have every incentive not to lie to you. > > And for you, to ensure that you have confidence in the information at hand before you make that decision. > > That is why the law isn’t needed. Haha. Too funny. What they have is every incentive to _not get caught lying to you_ (too often). Have you observed mankind in the wild before? It is a tricksy species, and individuals can be counted on (in general) to use any advantage at their disposal to increase their social status within the group. ---
**Author:** ![smiling\_bandit](https://avatars.discourse-cdn.com/v4/letter/s/e9a140/32.png) [@smiling\_bandit](https://boards.straightdope.com/u/smiling_bandit)\ **Post date:** [April 16, 2013, 7:52pm UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/36 "2013-04-16T19:52:02Z")
> [@Eonwe](#): > > Have you observed mankind in the wild before? It is a tricksy species, and individuals can be counted on (in general) to use any advantage at their disposal to increase their social status within the group. That, and in a large group there’s always going to be difference of interest. Some people are going to get a bigger personal benefit from short-term change, or even damage. And at times, this group can get pretty large. Even if nobody’s intending conspiracies or bad moves, by sheer chance among all companies, or even just large ones, you’re going to end up with some people in a position where their self-interest moves them towards cheating. Enron didn’t start out manipulating markets and cheating their clients; it happened over time due to a toxic culture and the fact that once they started, made a few mistakes or went wrong, it was hard to turn around. Note that the company could certainly have come clean early on and would likely have faced no punishment or penalty. But doing one bad deed made it easier to do another, then another. Then the whole ccompany was sick. > [@Hellestal](#): > > 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. That’s not how it works, in any market or nation on earth as far as I know. The information doesn’t have to be gathered conveniently in one place. It just has to be publicly available and the company has a responsibility to make it so; at the same time, they can’t execute trades against information not publicly known. If you’re planning to make big investments, a lot of data-gathering and research is still involved. Nobody has to hand it to you on a platter. ---
**Author:** ![robert\_columbia](https://avatars.discourse-cdn.com/v4/letter/r/e79b87/32.png) [@robert\_columbia](https://boards.straightdope.com/u/robert_columbia)\ **Post date:** [April 16, 2013, 8:12pm UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/37 "2013-04-16T20:12:55Z")
What about banning corporations from keeping earnings, etc. data secret for any meaningful length of time? A typical case of insider trading involves an “insider” knowing that earnings will be greater than projected and buying lots of stock in the company before quarterly earnings are announced. What if there weren’t quarterly earning announcements at all, and companies had to keep their books open at all times? Interested investors could then call Conglom-O at 3:30 in the afternoon on a Tuesday and have a copy of all accounting records since the last formal earnings report by close of business? Better yet, make them publish it online. Oh my, BigCorp just sold 300 widgets today, there was a meeting to discuss potentially firing the CEO, and the company rejected an offer from CompuGlobalHyperMegaNet to buy the company at $45 a share. ---
**Author:** ![BrainGlutton](https://avatars.discourse-cdn.com/v4/letter/b/82dd89/32.png) [@BrainGlutton](https://boards.straightdope.com/u/BrainGlutton)\ **Post date:** [April 16, 2013, 8:14pm UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/38 "2013-04-16T20:14:33Z")
> [@IdahoMauleMan](#): > > Ah, yes. What we need is _more_ government oversight, not less. More enforcement authority. More rules. That will stop them. More, or simply better, yes. That **will** stop them. ---
**Author:** ![Icarus](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/icarus/32/72_2.png) [@Icarus](https://boards.straightdope.com/u/Icarus)\ **Post date:** [April 16, 2013, 8:36pm UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/39 "2013-04-16T20:36:03Z")
> [@robert\_columbia](#): > > What about banning corporations from keeping earnings, etc. data secret for any meaningful length of time? A typical case of insider trading involves an “insider” knowing that earnings will be greater than projected and buying lots of stock in the company before quarterly earnings are announced. What if there weren’t quarterly earning announcements at all, and companies had to keep their books open at all times? Interested investors could then call Conglom-O at 3:30 in the afternoon on a Tuesday and have a copy of all accounting records since the last formal earnings report by close of business? Better yet, make them publish it online. > > Oh my, BigCorp just sold 300 widgets today, there was a meeting to discuss potentially firing the CEO, and the company rejected an offer from CompuGlobalHyperMegaNet to buy the company at $45 a share. Forgive me for saying so, but you have never worked in a large company, have you? It is a major effort on a daily basis for everyone with a piece of data to put that piece of data with the piece of data from the person down the hall, etc. etc. etc. until you have a consolidated pile of data. Then it has to be crunched and then checked, etc. etc. etc. And then corrected and revised, etc. etc. etc. So just getting the information out in a raw form would be very time consuming. Next comes analyzing the data to make some rudimentary sense of it. Are you suggesting every Tom and Harry with and internet connection be given all of the daily raw data from General Electric? So, assuming the answer is, “No, of course not. I expect to see the consolidated totals.” Well, someone somewhere in the organization has seen the raw data a week ago, and they know that the result is going to have an impact on the final numbers - insider information. Now do you see? ---
**Author:** ![smiling\_bandit](https://avatars.discourse-cdn.com/v4/letter/s/e9a140/32.png) [@smiling\_bandit](https://boards.straightdope.com/u/smiling_bandit)\ **Post date:** [April 16, 2013, 8:46pm UTC](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731/40 "2013-04-16T20:46:40Z")
> [@BrainGlutton](#): > > More, or simply better, yes. That **will** stop them. Whence comes this absurd statement? It ain’t never done so before, and all the rules in the world haven’t stopped it so far. Your assertion is based on faith, and a particularly blind faith at that. [Previous page](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731.md?page=1) [Next page](https://boards.straightdope.com/t/why-is-insider-trading-illegal/655731.md?page=3)