> Many people on Wall Street felt that Bharara’s crusade against insider trading was recklessly broad: An analyst like Horvath might knowingly obtain an illegal tip, but if he feeds his information up the chain to a Steinberg or a Cohen, and they take his word that he is not passing along stolen goods, should they really go to prison for that misplaced faith? Is it fair to convict someone of engaging in insider trading if he didn’t know he was doing so at the time?
This quote is interesting. I know that in some countries (including my own,) dealing in stolen goods is in fact illegal, regardless of whether or not you knew the goods were stolen in the first place. The onus lies on the buyer of the goods to remove doubts of where the goods came from, which often amounts to simply asking the reseller for a receipt. If you're given one which is bogus, you can claim ignorance and whoever you bought it from would be guilty of fraud as well as dealing in stolen goods.
Now, I don't know what the law says about dealing in stolen physical goods in the US, but if it's anything like the above then why should illegally obtained information be any different? Shouldn't it be reasonable then to ask whoever is dealing in this information to ask for a receipt, as it were?
In the US, most states have said that in a person to person sale, you are only committing a crime by buying stolen goods if you know the goods are stolen.
But, there are separate laws for commercial entities who deal in second hand goods (like pawn shops). They must do proper due diligence when buying goods or they will be held accountable if those goods turn out to be stolen.
I would assume that financial firms should also be under extra scrutiny in the same way. But alas, our phony government has made it clear whose side they are on.
Criminality has been dependent on internal mental state since the dawn of time. Like when you kill a person, it ranges from self defense to manslaughter to murder (and maybe terrorism now). That is not what "thought crime" means.
"Thought crime" is a poor description because it is not a thought being punished, but an action. You couldn't be punished just for thinking about stolen goods.
Analyzing intent is important to differentiate between people who have likely already learned from their mistake, and those who are likely to exploit others in the future. Punishment is only necessary in the latter case.
That's actually the only reasonable definition of crime in a perfect world. It's because we don't live in a perfect world that we must focus on acts instead of intentions.
It's been an important part of law for a long time, although there's a tendency to explicitly avoid it in legislative efforts in the US since the '60s and the advent of MPC (https://en.wikipedia.org/wiki/Model_Penal_Code)
Problem: Insider trading isn't about illegally obtained information. The SEC defines insider trading as:
> "Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security."
So if I hack into someone's server and steal a bunch of secret financial data, and use that to trade, then I am trading based on illegally obtained information, but I am not committing insider trading, because I have no fiduciary duty or relationship of trust and confidence.
Conversely, if I'm a director of a company being acquired, and I trade on my knowledge of the acquisition before it is announced, my knowledge was not illegally obtained, but I am violating a fiduciary duty to the company.
As a general rule (there are exceptions!) insider trading never involves illegally obtained information. It's either illegal information I wasn't meant to know, or it's information I was meant to know but wasn't meant to trade on.
(Note that the news recently broke of a Ukrainian hacking group that was stealing unreleased press releases and selling them to traders. Headlines almost universally called the group an "insider trading ring", but what they seem to have committed was wire fraud[1]. The SEC is gamely trying to pin some security fraud charges on them, because that's what the SEC does, but the plain text of the underlying law is against them, and that theory has yet to prevail in court.)
In the Dell/hedge fund case the New Yorker is talking about, it seems clear that the Dell analyst had a fiduciary duty to Dell, although he was never charged with insider trading, probably because he didn't trade. And the hedge fund guys clearly traded, but they didn't have a fiduciary duty to Dell. Nor could prosecutors point to some sort of exchange where the Dell guy swapped insider information with someone who then traded. If the information had been stolen, then it might still have been a crime (even if not insider trading). But apparently, it wasn't stolen.
In short: Insider trading is about trading in violating of a fiduciary duty or a relationship of trust and confidence. It's not about trading based on illegal information. This is true despite the fact that a lot of people sort of think it would make sense if it was otherwise.
Edit: A further point of clarification; insider trading law is written to protect a company from the misappropriation of their secrets by insiders for their own benefit. In the example being discussed, it's intended to protect Dell from being harmed by their investor relations guy (Rob Ray, in this case), and it clearly allows the prosecution of Ray if he used Dell's material nonpublic information for his own benefit. Except, in this case, there's no accusation or evidence that he did; he seems to have been trying to use Dell's information for Dell's benefit, and didn't benefit personally at all. That's actually legal. (Well, Dell actually has some rules on what they can let their investor relation's people share, but if those rules were violated then Dell or Ray would be in trouble, not the people they told, and it still wouldn't be insider trading.) But as far as insider trading law goes, the only real possible victim is Dell (it was their information), and the only real possible criminal was Ray, or maaaybe a close relative of Ray, a golf buddy, roomate, etc., or maybe someone who paid Ray to victimise Dell. But Bharara didn't go after Ray or anyone who knew Ray, and he didn't phrase the issue in terms of the damage done to Dell, and that was fundamentally at odds with how insider trading law works.
What Bharara seemed to want is a law that protects small investors from hedge fund traders, not a law that protected Dell from Ray. He's not obviously wrong to want such a law, but he was wrong to think one existed. In any case, keep in mind when discussing insider trading law as it currently stands: It will make ZERO sense unless you remember that it was written to protect Dell from people like Ray, rather than mutual funds from people like Steve Cohen. Even if Dell doesn't really need to be protected from their own investor relation's flaks, and mutual funds really need to be protected from Steve Cohen.
Sweden, and in the case of not knowing you were dealing with stolen goods but still found guilty it seems the worst case scenario is six months in prison. [1]
This wasn't always the case, but I can't quite remember when the law changed. It used to be that you could claim you bought the goods "in good faith" in which case you'd be free of liability unless there were other hard evidence to connect you with the crime – even if you bought that high-end watch off of some dude selling watches on the street out of a cardboard box.
These days however, it's much easier to convict someone (whether selling or buying) because of a clause that includes anyone who didn't know but had reason to believe the goods were stolen. It's easier for the prosecution to prove the latter, and probably gets rid of most "it fell off the back of truck" arguments. That high-end watch from that shady dude on the street would probably get you a fine these days. (Putting people in prison is costly, after all.)
No. If you bought a high end watch from a shady dude well below market price and without any papers, you could be found guilty of a crime (posession of stolen goods) before the law changed as well as after the law changed. Nothing has changed there.
However, if you bought a used watch at a reasonable price with some plausible documentation, this is where things has changed somewhat.
Before, if you had bought the watch in "good faith", i.e. there was no obvious reason for you to suspect it was stolen when you bought it, you were entitled to keep the watch even if it was later found out it was indeed stolen. Even if they later found the previous owner, he wasn't allowed to have it back. He had to go after the thief to get compensation (even if the thief is unknown).
That last thing is what changed. If they find out the watch is indeed stolen, you have to give it back to the previous owner, even if you bought it in "good faith". But you have not committed a crime, you will simply have to give back the goods to the right owner. Now it is you as a buyer that has to go after the thief for compensation (because he scammed you by selling stolen goods).
I am not a lawyer nor a German, but Wikipedia says that German law has no strictly liability [1], which would seem to imply that knowledge (or at least belief or a willful lack of knowledge) that the goods were stolen would be necessary to prosecute that crime. Is that wrong?
You are right in your assumption. § 259 requires intent. Usual interpretation is that the offender needs to know the fact that the good was somehow acquired illegally (but doesn't need to know any details). It's not enough to think of a possibility of such an action, they have to resign to the fact. (There are other obligatory characteristics that need to be fulfilled, but they are irrelevant to this discussion.)
Simply handling stolen goods is not a criminal offence in Germany.
Possessing stolen property on Wall Street only appears to be a crime if you "knowingly possesses stolen property, with intent to benefit himself or a person other than an owner thereof or to impede the recovery by an owner thereof." [0] This ruling makes the insider trading law more like the law dealing with stolen property.
But realistically if somebody tells me to buy or short X, I won't do that without asking why. How is it possible that the person does not realize they are being handed insider information?
If you pay someone to predict stock movements, and they come to you and say, "short Dell and do not ask me why," you would probably act on that information. After all, you're already employing them for their stock market expertise.
As a private citizen without an army of analysts, you would probably subject their claim to more scrutiny. It sounds like insider trading is only "legal" now if you own a hedge fund.
But if you're employing someone to predict stock movements, you presumably are paying them to provide you with advice that will result in profit rather than loss which would make the "why" somewhat implicit. As well, a major red-flag should be raised should anyone tell you "do not ask me why."
Insider trading is legal now if you are powerful and wealthy and not an appropriate candidate for some sort of selective enforcement of the laws, it seems.
If you own a sketchy hedge fund, major red flags could mean that no one else is either privy to or willing to act on that information, meaning that you will make even more money.
And with the new ruling, all you have to do to keep your actions strictly legal is follow that analyst's advice and not ask any probing follow-up questions.
I can imagine if your job is to predict stock movements and you are hired for those predictions (as a company, not as an employee), then I can imagine not wanting to hand out the analysis, as that could then be shopped to others. Without your reputation and/or analysis, someone reselling your predictions is less likely yo be successful.
That said, if you are employed by the company, the work and the product is all owned by them, so there's no reason not to provide all information when asked.
> Insider trading is legal now if you are powerful and wealthy and not an appropriate candidate for some sort of selective enforcement of the laws, it seems.
I think you can replace insider trading in that statement with just about any other criminal act and it's still mostly true, in most parts of the world.
You're paying an analyst to look at Dell. You know that they went to lunch with a Dell investor relations person yesterday. They tell you they think Dell are going to miss earnings this quarter.
None of that is illegal. Unless you're a micromanager you wouldn't ask why they think that - that's their job.
That's a core principle of the law of all those countries, similarly strictly applied. The issue here is not the proof, but the definition of guilt. If you know you are supposed to ask where something comes from, you are guilty if you don't.
It seems like some constituency likes the idea of legalizing insider trading so much that they grasp at a variety of straws in an effort to find some analogous place where it would be legal.
But these are very thin reeds.
"Suppose I have a business where I get stuff to sell on a 'don't ask, don't tell basis', that would be totally legal and no one would complain..." sure
"It's just information, information shouldn't be property"
--> Any employer has information they want private. If someone there was no overt law against spilling out one's employer's private information, it would certainly be a condition of employment. And intentionally doing anything that is - against your condition of employment and costs your employer millions of dollars, is going to wind in serious civil trouble. That state has decided to make this criminal also is entirely logical.
If a shop foreman takes money to shut down a factory for a day to benefit a revival, he would be guilty of theft without "shutting down a factory" being an otherwise criminal activity.
The fundamental thing is taking money from someone, which insider trading certainly does. Those who buy a stock on an insider get money - meaning those who sold the stock lose it.
What about a journalist publishing leaked information? In such a case, it is up to the company to stop leaks. People outside the company have no obligation to help them.
> Those who buy a stock on an insider get money - meaning those who sold the stock lose it.
This is definitely not true; those who buy a stock on inside information are buying from people who independently decided it was a good time to sell their stock. Those people are likely, in the counterfactual universe, to sell their stock anyway.
And while a shop foreman might be guilty of theft for shutting down a shop in response to a bribe (I find this a little unlikely, but won't express further opinion than that), the money which changes hands can't be relevant to that, since the theft would be from the factory owner or operator, while the money comes from a completely different source.
This definitely is true. If the other party had the same information they would have sold or bought at a different price point. (or maybe not at all+) That has to be because that's the attraction of insider trading, I know something that will cause you to misprice the trade in a way that benefits the insider trader.
+ Consider the person trading in insider information, namely that Cogswell's Cosmic Cogs has agreed to buy Spacely Space Sprockets at $12/share. Someone with stock in Spacely Space Sprockets would likely chose not to sell at the current market rate of $9.25/share if they knew that.
> If the other party had the same information they would have sold or bought at a different price point. (or maybe not at all+) That has to be because that's the attraction of insider trading
This doesn't follow at all. Trades happen all the time between people with the same information. Under your theory, that's impossible.
It's also not particularly relevant to the main point. The idea of banning insider trading isn't to reflect inside knowledge in the price instantly -- that would be accomplished by encouraging insider trading. The idea is to prevent people with inside knowledge from trading. People who sell to someone trading on inside knowledge get a little bit more money (due to higher demand) than they otherwise would have. They miss out on gains that the person with inside knowledge predicted, but that they also miss in the relevant counterfactual (when they sell to someone else with no inside knowledge).
A few end up selling when, in the world without the insider, they wouldn't have. Those people can't be identified and quite plausibly realize the same gain under either scenario, for example, if they have a standing order to sell at X price.
Look at what https://news.ycombinator.com/item?id=10488948 wrote. The laws against insider trading aren't there to protect one market participant from another, they are there to protect a company from its employees.
Stolen phone doesn't look different from a legit one, you need to actively verify its record. I doubt an insider tip can be honestly mistaken for a legit one.
Which makes the plausible deniability even weaker.
You might have a tip about a merger because a PI is watching a corporate parking lot. Just because something is a secret, doesn't mean an insider leak is the only way for it to be known.
Insider trading does harm people, and does reduce liquidity. Many people who understand classical economics get this wrong [0], because financial markets are a very degenerate kind of market from the point of view of classical economics.
The fundamental error in all cases is to conceptualize insider trading as buying from someone who would have bought/sold anyway. This is precisely failing to think at the margin. It is as erroneous as saying "eating meat is ok because those cows would have been killed anyway". Put more technically, when you buy a share, you do so by shifting up the demand curve a tiny bit, with your demand, which in turn shifts the price slightly up and causes a seller to sell, who would not otherwise have. Market microstructure, together with the fact that supply/demand curves really form a single curve, can obscure this fundamental economic fact.
Given this, insider trading does cause harm to some people. And how could it not? If a person can make money from insider trading, then, to first order, someone else must lose money. There are some externalities from information revelation, but only a tiny fraction of these benefits go to the marginal buyer/seller who lost out because of insider trading.
How does this compare to public releases of information? Well unlike insider trading, public information can shift prices without any transactions occurring (or in practice, very few). This is because while insider trading only moves the price by the mechanism of moving the supply/demand curve, while public information is revealed to all traders at once.
So while insider trading does reveal information (which is a good thing) it does so in a way that reduces liquidity, because people don't want to be on the wrong side of insider trading.
I'll admit that the above narrative isn't watertight. I think it's the best analysis that can be done verbally. The only models that allow a meaningful discussion of welfare in the context of financial markets are so called noise-trader models, which explicitly model the (irrational) reasons why most people trade. The whole field is vastly complicated by the fact that theory predicts almost no trade in stocks if people were completely rational.
You completely ignore the benefit of the more accurate price.
Let's say the price of a share with the inside info is 110. It is now 100. The inside trader does cause some volume that wouldn't have happened otherwise, and moves the price to 105 -- to the detriment of someone who would not have traded otherwise. But then every subsequent trade is at a price closer to the true one, a clear benefit.
It is true that greater information asymmetries will decrease liquidity/widen spreads, but is this a sufficient justification for banning inside trading? Also, information asymmetry is a matter of degree, not a binary thing. A skilled fund manager may have assembled public information (the "mosaic" view) that when put together is tantamount to insider info. You could use the exact same argument to ban him from trading.
I wouldn't say that I ignored the benefit or a more accurate price, since I explicitly mentioned this benefit twice. But I wasn't clear enough of the implications. To clarify: insider trading has both benefits and costs, and there is no simple argument that shows which is greater. I was primarily addressing people (like in the article I referenced) who say that insider trading is clearly and unambiguously good.
Theft benefits the thief while costing the person stolen from.
If one can backup and use a fuzzy enough lens, one can just ask "how should society calculate the total benefits here" but the problem is this begs the question of whether it's proper for the state to just ask these questions.
My impression is that none of the insider trading proponents are also proponents of the view that it's not theft to take money that falls off the back of an armored car because "it's hard to who it belongs to" and "we might well benefit from this money more than whoever it really belongs to" but their arguments seem the same. Further, the average people finding money on the street probably really do need it more than your average insider trader.
> Theft benefits the thief while costing the person stolen from.
> If one can backup and use a fuzzy enough lens, one can just ask "how should society calculate the total benefits here" but the problem is this begs the question of whether it's proper for the state to just ask these questions.
But in the case of insider trading, there is no such person. Lambdapie identifies that there is a cost (yes!), but that cost only exists at a fuzzier level than "the person stolen from". Trying to examine at a finer level doesn't make sense.
What if you considered the lost "profit" the non-insiders would have made from buying at 100 rather than 105, or 103, or whatever price results from normal speculative activity?
But there's also bad incentives tied to it - with inside information, you're incentivized to keep others in the dark so that you can maximize the impact of your trades. Things like borrowing money to short stocks in a company likely to go bankrupt, while telling people to buy.
I don't think so, but I think that could be handled on the side of the court, not the side of the exchange. It could certainly be illegal, or at least a disbarrable offense, for a judge to use his or her knowledge for personal gain. Likewise, many of the most flagrant examples of insider trading could be covered under trade secret or contract law, like a CEO shorting his or her company then purposefully sabotaging it.
That sounds like a question for a professional ethics board. I would assume a judge caught doing that would be sacked, disbarred, and publicly shamed, even if everything he did was strictly legal.
You completely ignore the benefit of the more accurate price
The gp does a good job of describing how insider trading actually takes money from particular people. Are you saying that a certain number of people should have their money taken in order that prices are closer to predicting otherwise unknown results? Something like "by eminent domain, we are taking your investment profits for the great good of accuracy in stock prices".
Moreover, the other people who benefit from price jumps from invisible sources are those who don't know anything but who are willing to gamble that these price jumps represent a real increase in value. The existence of such gambling would seem like it increases the overall volatility of the market and given that such gamblers would tend to magnify random jumps in the market as well, it seems like society broadly would not experience any benefit.
The problem is that insiders can actually (and easily, and even subconciously) change that price.
Let's say I believe that the company I work with is horribly mismanaged. I short it. Then, all of a sudden, an announcement comes ("corp X is going to buy our company") that raises the price and makes me lose my pants. I have two choices now:
a) lose my pants, or
b) use the due-diligence period to try to kill the deal from the inside.
Are you willing to hold stock of a company in which (b) is likely to happen? I don't.
Furthermore, even though a 5% discrepancy is already huge, in many cases it is much larger than that: valeant recently dropped 70% in a few weeks, and insiders knew all about the irregularities1; If allowed to short, a new employee, upon discovering those irregularities, has a great incentives to quit, short, and go to the newspaper. While this would deliver justice much more swiftly to the company, it would do so to the benefit of that individual at the expense of everyone else. We disallow vigilante justice in general for good reasons and this is no different.
Bad argument because you stated the problem. Insider trading is bad because of what you pretty much said. Liquidity is only important when considering how fast you want to buy or sell your stakes in a company.
If an insider knows a stock will yield him 10% profit and has a month of time to buy stocks, even if the daily volume is 500k shares. They can gradually buy shares at 20k/day, and once that news becomes public and the liquidy goes up they can sell off all of their shares in one shot pretty much. And people just just got news of the information would think that their stock has a 10% upside, but since someone already beat them to the 10%, they aren't going to get anything.
I basically agree with this, but I don't think it helps that much to answer the question of which trading activities should be allowed, and which should send you to prison. Almost all of what you've said applies equally well if you replace "insider trading" with "professional trading".
If you send a 1000 share buy order to the market, knowing that you're going to send 99 more of them throughout the day, you're making money (or at least losing less money) because of information that you have and your counterparties don't. And that kind of trading definitely has a negative effect on liquidity (almost the whole difficulty in market making is preferentially trading against people who aren't doing this). But this splitting of orders is universally viewed as "ok", and is how most large-volume trading is done these days.
The difference between this and insider trading is in who owns the information. Most people view the large-volume trader as doing something okay, because they own the information about their own future trading behavior. Insider trading is illegal not because it's unfair to trade on asymmetric information, but because you're trading on information that was stolen from the company. (This is why Mark Cuban didn't go to prison: a company gave him some insider information, but forgot to ask him not to trade on it; no stealing involved).
From this perspective, it makes sense to prosecute the original tipper, and anyone in the chain who knew (or should have known) that the information was stolen (by analogy to the crime of passing stolen goods), but not the guys at the end who were clueless about the scheme. (Although it might make sense to make them disgorge their trading profits.)
The other difference is that inside information isn't available on a reasonable and non-discriminatory basis. Traders pay for advantages all the time: Bloomberg terminals, news services, hire better analysts, pay someone to count cars in store parking lots, purchase faster computers or data feeds, but anyone else can do the same. Some players have an advantage, but the playing field itself is relatively level.
With inside information, it's not available to people outside the tipping network at any price. This, more than the mere chance of getting "picked off" by asymmetric information, drives traders out of the market, making it less liquid. If they were just losing because they didn't have good enough analysts, they could always compete and hire more. For the same reason, regulators and exchanges try to keep manipulators out of the market even if they bring a lot of volume. Eventually people will lose confidence in the market itself and leave.
> With inside information, it's not available to people outside the tipping network at any price.
But surely this is begging the question? If there were no laws restricting trading wouldn't information that we currently call "inside information" become available at some price? I could easily see some exclusive, high priced news service selling these leaked facts. It would then cause the "true price" of the stock to be found much, much quicker.
I don't think exclusive access would be legal, and if access isn't exclusive, the value of the information would drop, as it's only valuable to the extent that it's not known by others.
Also, simply being aware that such a service exists and can release information at certain times would let uninformed traders exit the market during releases. Right now insider traders can arrive randomly at any time.
> With inside information, it's not available to people outside the tipping network at any price.
Let's take a stylized version of a recent insider-trading case:
- A company ("Conglomacorp") employs someone ("Big Mouth") to dispense inside information to investors. Usually he does this by sitting in his office and answering phone calls. (This is common, and definitely legal.)
- A particular investor ("Shylock") develops a friendship with Big Mouth, and regularly goes to dinner with him. At dinner, Big Mouth tells this investor company information.
- Shylock trades in Conglomacorp stock.
- It's stipulated that if the information that Shylock received had been dispensed during work hours, there wouldn't have been any legal problems. But he is prosecuted on the theory that, since it was dispensed at dinner, outside of work hours, he should have been aware that trading on it was illegitimate.
How does this case fit in with your ideas of insider trading? It's certainly not the case that "[the inside information is] not available to people outside the tipping network at any price". You have to be a big enough investor that the investor relations desk has time for you, but that's open to anyone.
Answering calls with individual investors and giving out material information is illegal under Reg FD. Not sure about this particular fact pattern, but being told something officially vs. over dinner/drinks can have a different expectation as far as confidentiality goes. That seems sensible.
Also, FWIW, and I'm sure this wasn't your intent, but "Shylock" is considered an Anti-Semitic slur by many people.
"Reasonable and non-discriminatory" is a technical term, and I think it covers this case. If the company accepts everyone's calls, or everyone who owns more than x% of their stock, or charges you $y/minute, it's fine for them to reveal information that way. Revealing information to individuals that Big Mouth personally decides to go to dinner with is not ok.
Despite the fact that it's the same information? There's no distinction, in the example, between information that it's OK for Big Mouth to disclose and information that he can't disclose. Such forbidden information might exist and be known to Big Mouth, but Shylock didn't receive it. How can the only problem be that it was disclosed outside business hours?
If it happens in business hours then it's Conglomacorp's job to supervise Big Mouth properly and make sure he's not playing favourites (which as your sibling points out would be a Reg FD violation). If Shylock wants to trade on information then he needs to get it through the official channel where it's subject to compliance monitoring and all the rest of it. I'm fine with it being a crime for him to get information from Big Mouth in a way that bypasses those processes even if it turns out those processes wouldn't actually have blocked the information in this case.
I agree that there are legitimate reasons to restrict insider trading, but I think that the "fairness" angle distorts more than it illuminates. Warren Buffet's trading plans for next year are not available to me at any price, and he can probably be 95% confident that after announcing he owns a stake in some company the price will jump, but I (and probably you) don't think that means he should go to prison.
Anyone buying a lot of shares will move the price up. Buffett makes money because he buys shares under their future value despite moving prices in the short-term, not because of it. Anyone can try to become as smart as Buffett, hire away his analysts, and so on.
> Anyone can try to become as smart as Buffett, hire away his analysts, and so on.
Anyone can try to schmooze corporate insiders so that they tell you some juicy information. And that seems a lot easier (theoretically and empirically) than becoming Warren Buffett.
I think the main trouble I'm having with your argument is the idea of it "harming" someone. While that seems to perhaps be true in the most technical sense, I'm not sure it's a sufficient argument for banning insider trading. After all, many things which harm people are not generally considered to be bad. For instance, if someone opens a restaurant Ina town, and runs the restaurant very efficient while offering a high quality product, that could absolutely harm other competing restaurant owners. And yet most people do not condemn the practice of opening a restaurant and operating it well.
You are right that "harming" someone is not a sufficient reason to ban an action. And as others have pointed out, researching a company carefully causes the same kind of "harm", and certainly shouldn't be banned. My intention was to refute people (like in the article I linked) who argue that all market participants benefit from and insider trader's transaction.
Once we see that this isn't the case, it becomes necessary to do a cost benefit analysis to determine the true effect of allowing insider trading. But as you say, this should be done on a utilitarian basis, not on some imagined "rights" of the counterparty to insider trading. (EDIT: I don't mean to imply that economic analysis from a utilitarian POV can't clarify what we should think of as people's rights, but rather that as you said, causing someone else to have a negative outcome does not prove that someone's rights are being violated)
Should judges be able to trade on the information about companies be is about to deliver judgements for? Should city planners be allowed to trade on the information on approvals / denials before they're announced?
Some other commenters have correctly pointed out that (1) my comment doesn't address whether the liquidity costs outweigh the benefits of extra information, and (2) why insider is different to outsiders doing research.
I do implicitly address these issues in my comment, when I compare public information with insider information. Noise traders are the goose that lays the golden eggs[0]. They irrationally trade randomly in a stock, masking the trades of informed traders. They make a trading loss on average, and these losses provide the profits of informed traders, which gives those traders the incentive for price discovery.
Although the simplest noise trader models can't capture this (as all information takes the same form) [1], public information is much less costly to the noise traders. So for example, noise traders lose a lot more if a company's earnings are leaked to a few individuals, than if these earnings are made public, because in the latter case the market maker can distinguish information from the the noise trader's trades.
So (and again, a model is really needed to confirm this) public information is cheaper in terms of its impact on liquidity, than insider information. One thing I'm not certain of is whether many insiders competing to trade on the same information would be as good as public information.
I didn't understand that article, probably because I'm unfamiliar with the author's other works. Is he proposing that a company be allowed to set rules regarding insider trading during the IPO? If so, I agree that in theory this would be efficient (or in the author's terminology, it would be acceptable from a consequentialist POV). But this is orthogonal to the issue. The people who want to ban insider trading would most argue that insider trading is inefficient, and therefore companies would choose not to issue stocks like this. And if they are right, we would still be in the same situation, it's just that instead of people violating a rule created by the government in order to maximize utility, they would be violating a contract created by the company in order to maximize the company's IPO price (which also happens to maximize utility).
Am I missing anything else? Did the author make a specific argument for why insider trading would prove to be efficient (i.e. why the effect on liquidity outweighed the increased information revelation?) I doubt it since the author's language suggest someone familiar with law and philosophy but not so much finance and econ.
The argument is that instead of having the government decide what's best, the company should decide (and it doesn't need to be during the IPO). Then, the so-called "free market" will decide whether it's good or bad. If they decide it's bad for companies, then companies won't allow it, because it will hurt their stock price. If they decide it's good, then companies will allow it.
Because obviously the market won't be completely free: companies deciding on their policy in the proposed regime would most certainly be influenced by factors beyond the question of whether it's good for their stock price.
Ok that's reasonable. I agree that in theory this argument makes sense. In practice I think the arguments that insider trading is inefficient are compelling enough (see https://news.ycombinator.com/item?id=10487779) that it's not worth pursuing this course.
Inefficient compared to what? The choice is not between "publicize the info" and "let insiders trade", its between insider trading and no insider trading, and the information stays private.
Inefficient compared to what? The choice is not between "publicize the info" and "let insiders trade", its between insider trading and no insider trading, and the information stays private.
You are implying that I don't realize that insider trading reveals extra information. But I have clearly stated in almost every post that insider trading would reveal additional information. There's no point continuing this discussion if I am responding to what you say but you're ignoring what I say. I'd ask you to keep an open mind and not assume that other people just need to be enlightened via terse replies.
>So (and again, a model is really needed to confirm this) public information is cheaper in terms of its impact on liquidity, than insider information. One thing I'm not certain of is whether many insiders competing to trade on the same information would be as good as public information
That sounded to me like you were against insider trading because it wasn't as efficient as public information. I don't get why that implies we shouldn't allow insider trading.
Your other post said that it necessarily harms someone, but I think that argument was successfully argued against in the link I posted above. Do you have a problem with that part of it?
Also, I would still like it being up to the company. If liquidity is important to them, and the experiment shows that allowing it leads to less liquidity, then eventually they'll stop it.
I don't think that market is inefficient enough to necessitate government action.
It also gives people in the C-suite perverse incentives especially at large publicly traded corporations, as if they do not already push for short term gains as much as possible.
If "material nonpublic information" is illegal to trade on, then the entire job of the intelligent investor ceases to exist. It becomes illegal to do thorough research.
So of course the source of the information matters.
I'm sympathetic to the argument that it's bad to take illegally obtained data and pass it along in a don't ask, don't tell manner to avoid prosecution. But that Dell data? The guy's job at Dell was to share company info with investors. To say the information was obviously dodgy is total nonsense.
"material nonpublic information" is a term of art. It means internal company information that is relevant to understanding the future financial performance of the company. Research based on outside information wouldn't be material nonpublic information.
Are you saying that "nonpublic" by itself implies that I got the information from an insider?
If someone else deduces the same information, does my copy stop being nonpublic? Or was I mistaken in thinking it was nonpublic at all, since someone could deduce the same information?
If I'm watching a company's delivery road from across the street, is all that info public even though it's only available to me and five other people in the world?
Yes. I'm not a lawyer and all that, but counting trucks on the street wouldn't be nonpublic information, even if it is more available to some group of outside people.
I think it is also clearly the case that concrete insider knowledge will be considered differently than deductions.
This goes on and on about the meaning of the term:
OK, lets get the camel's nose inside the tent. Imagine I am a janitor who works at Acme Inc. I notice that the board meets every Tuesday at 2:00 PM and they always laugh and seem to have fun. I can't hear anything behind the glass doors but it seems that they are all merry. Now, fast forward some time and I see that the meetings are not merry any more. It looks like there is a lot of yelling and banging on the conference room table all around. They all come out from the board room calm and composed though. As usual, I can't hear anything.
Now, I pass on this information to someone. They short the stock based on this information alone. Have I or the person I talked to broken insider trading rules? I'd say no.
The SEC would say yes. There was an employee who worked at a rail yard who noticed certain visitors and other things and decided to buy the stock. The company was purchased shortly thereafter.
How did a couple of railroad yard workers catch wind of a multibillion-dollar leveraged buyout? The complaint says they suspected something was up when they saw “people dressed in business attire” taking tours of the rail yards. It suggests their curiosity was further piqued by a day-long rail trip the Fortress folks took in a special train car reserved for visitors.
If the information isn't market-moving (i.e. would not cause a reasonable investor to change their prices - a judgement for the court) then you're in the clear.
If it is market-moving and Acme lets you share that information then they're violating Reg FD.
If it is market-moving and the person you talked to knows that you weren't supposed to share it, that's insider trading. When does the court say they should have known that you weren't supposed to share the information? When they know that you received a personal benefit for it (or a few other circumstances e.g. they know you agreed to keep it confidential).
This is particularly important because often these cases are about investor relations people rather than janitors. If an investor relations person tells a trader something, they can trade on it. If a trader bribes an investor relations person to tell them something, they can't trade on it. (The law aligns with common sense here IMO). Now, what if an investor relations person tells an intermediary something, and then they tell a trader that thing, and the trader trades on it? The law here is that the trader has to know that the investor relations person was bribed - because otherwise they have no reason to think they're committing a crime.
I'd say it is considered inside information if you convey any notion of how the business goes to a select (closed) group of people, and it will be illegal of them to act on that information.
Is it illegal for you to act on that information? I should think so, but it will be hard to prove unless you do a unreasonably large trade.
Ridiculous. Having access to information others don't is privilege, not thoroughness. You can be just as thorough as you want, so long as others are not prevented from being likewise. Without that, capital markets cease to be open. That way lies oligarchy.
Not sure why you're getting downvoted. You're absolutely correct. Having access to insider information is about knowing people on the inside, or having some sort of special access to that information. By definition, it gives the person unfair advantage over others in the market.
I don't think that's true. If you have a friend on the executive board of pharma company X, and he confides in you over the phone that the internal trials for the company's next big drug failed big time and they're going to announce the results to the public tomorrow, and you dump the stock... that's insider trading. It wasn't theft. The information was willingly given to you by an insider. And it's a crime because you made a trade based on non-public information, and the law has deemed that to be unfair and illegal.
The insider had no right to divulge that information. I don't care whether it's technically theft but it is definitely immoral, and should definitely be illegal.
If I'm busting my ass off in a startup I sure as heck don't want my buddy to sell or give away our trade secrets to the competition.
Also, think about the people on the other side of that trade. They're buying the stock being dumped based on public information, and you're taking advantage of their ignorance. Morally, that feels awfully close to stealing from them.
Profs Fischel and Easterbrook were working on the analytical framework (efficient continuous release of information, if i remember), starting in the 80's: http://www.law.uchicago.edu/node/514/publications
If everyone with inside information could trade on it without fearing the law, they would reveal the predicted effect of said information via movements in the price of the security.
Therefore, free and legal insider trading would actually increase fairness in the market.
Nope, what would happen is that everyone without inside information would simply not trade in that security. You would not have a stock market because only people that know the company very well would dare buy stock in it. The cost of capital for companies would skyrocket and the US economy would tank.
It is amusing to me how when all these amateur game theorists create these hypotheticals to prove that insider trading is good, they always assume that there is an endless supply of chumps with an endless supply of money willing to take the opposite end of the trade. Well, let me tell you, people are not that stupid. Especially people with money.
Back in the dark ages, most people with money felt the best place to keep them was locked in a chest in the deepest room in a large castle. There was very little investment, and the dark ages were a time of extreme poverty. It is only through a long series of laws and institutions developed over couple of hundred of years, that we have reached this point of mobility of capital, which allows capital to go where it is most useful, and greatly benefits the economy. But if we remove investor protections things can slide back very easily and very quickly.
That question almost reads like a criticism, but I'd like to throw my hat into the ring here and say I'd like to know how markets cope in this situation. Do we have real world examples?
Lots of real world examples. Eg Japan and Germany still have lighter regulations on insider trading, and in the US and UK people used to trade before insider trading was banned.
Insider trading probably ought to be thought about when designing regulations---but I am not convinced either way that it should be banned.
Sorry, too busy to do the research now. But people did trade before such regulations. And even today, eg Japan and Germany have notably lighter regulations on insider trading.
Both Germany and Japan ban insider trading. It is debatable whether their regulations are lighter and whether their regulations are sufficiently lighter to make a difference.
I agree, that narrow viewpoint of fairness would increase. But wouldn't the general perception of fairness decrease? I mean, all those Edward D. Jones strip mall and small town stockbrokers would probably loose business because of the perception that only bigtime Wall Street insiders can actually catch good deals.
Of course, the sleazier Edward D. Jones strip mall and small town stockbrokers would probably increase their own profitably in the short term by lying to customers about having insider info. It would work until the gullible customers were tapped out.
> But wouldn't the general perception of fairness decrease? I mean, all those Edward D. Jones strip mall and small town stockbrokers would probably loose business because of the perception that only bigtime Wall Street insiders can actually catch good deals.
Sounds like a good outcome to me, since that's basically the case anyway...
When those insiders represents a minority (in capital available to trade with), the positive effects of their trades from improved price signals can be far smaller than the negative effects from the bad incentives created. Consider a government administrator trading with relatively small sums, knowing what effect his unpublished decisions will have. He can make gains that are large for him, while causing significant losses for others that otherwise wouldn't have happened.
I said free and legal insider trading by everyone. People in the company would also be able to trade on their information regarding potential government actions etc.
Some people have very disproportionate access to accurate information, and this disproportionate power and influence. You can't dismiss the harm abuse of that can cause. Just look at all the staged games done for the sake of betting profits.
So, the situation will be no worse than it currently is, but with the upside that more information would be available, and tons of money would not be wasted on stupid investigations.
I do recommend you watch "American Greed" on CNBC.
Free and legal insider trading would be the end of stock markets. If it becomes publicly known that some people trade stocks based on insider information then for all the others investing in stocks stops making sense. It's like casino publicly announcing that all it's roulette wheels are fraud and noone will ever win on them - this would wipe all the gamblers out.
The only chance for the regular guy to make money for retirement is through the stock market. No pensions and polices like 401k and low interest pretty much leave no other chance.
I am fine if Wall Streeters rip off each other but with the regular guy pretty much forced into the stock market I think there should be very tight regulation and certainly no insider training.
For a regular guy, investing in the stock market is a great idea, but trading stocks is a terrible one. (In other words, index and forget it). If you don't trade much, then insider trading is probably more likely to benefit you than harm you, since it leaks information, making prevailing prices more accurate.
I naively assume that the only way to succeed big in wall street is to rely on insider information. The rules against insider trading only hurt those trading at home believing the playing field is level. But I don't know how it really works.
In a perfectly efficient market with perfect information there's no profit to be made. So to make money you either have to be more efficient - either by market-making where you do millions of small trades, or the kind of value investing where you just buy what other people are selling and vice versa and hold them for a while - or you have better information. (Which doesn't have to mean inside information. It's certainly possible to make a living out of good old-fashioned detective work based on public information - recent clever tricks have been e.g. tracking the tail numbers of CEOs' private planes to know when they're on holiday and/or negotiating a merger).
A perfect market, which is a stupid assumption, can indeed make profit. You are assuming that an economy is a zero sum game but it is not. Transactions are made because both parties come out ahead.
In a perfect market middlemen (i.e. traders) would make no profit - participants already have perfect information and there are enough buyers and sellers for all goods, so people trade directly and would get no value from intermediaries.
This assumes (quite wrongly) that the same goods have the same utility across the population. It's similar to saying, in a perfectly efficient economy, there would be no trades. There are, because there is a benefit to that trade -- and there is no reason for that benefit to be evenly distributed.
The empirical evidence for your gut feeling is actually pretty strong. You are better off putting your money in a nice indexed fund instead of trying to chase money in the market.
Insider trading is just one more thing that increases income inequality. Not surprised that the Supreme Court passed on this.
A little off topic but I am so pissed off that US Congress members have passed laws that make themselves and their assistants immune to being prosecuted for insider trading.
You know the system is getting more corrupt when such bad behavior is not even hidden from public view.
Hold on. It's not the market's job to correct for income inequality. It's the job of a market to rapidly incorporate information into prices, so that everyone who needs to participate in commerce can do so with a shared picture of the value of different things.
Income inequality may be worth correcting for (I sure think it is), but it does not follow from that view that markets should be distorted to try to accomplish that. There are plenty of other instruments we can apply to that problem that will be more effective and will harm the economy less.
Congress didn't make itself immune to insider trading. In fact they recently made it illegal for congressmen to trade based on confidential information.
The reason it wasn't illegal for them before the recent law was because they weren't insiders. Congressmen do not owe a fiduciary duty to third party companies. And they don't owe congress or the government confidentially for stuff they learn on the job.
In fact the whole insider trading rules were not even passed by congress. It's a mix of SEC regulation and essentially federal common law that created insider trading law.
Also congress wasn't really immune. If a congressman payed Tim Cook for Apple info, that would have been illegal.
Unfortunately the headline is mistaken. Insider trading law was only ever intended to reserve for senior executives the privilege of trading on inside information. This latest interpretation is a confirmation of that purpose, not a repudiation of it. Bharara has been a true believer, but if he's going to stray from the South Asian beat, he's going to have to learn the real rules.
Perhaps I'm influenced by those cases that the news media has chosen to publicize. Clearly Mathew Martoma would still be "guilty" under the newly-clarified rules. I really wonder about e.g. Raj Rajaratnam, Anil Kumar, or Rajat Gupta, however.
Didn't Gupta sit on the board of public corporations and slip Rajaratnam earnings information right after a board meeting? That seems about as clear-cut as it gets. Gupta had a clear duty of confidentiality serving as a high-level executive and the information was obviously material to the share price. You don't get much more material than quarterly earnings.
Not related to the actual article, but I got stuck on the word "coöperating".
Originally, I thought the "Umlaut" is a typo or a mistake, but, according to wiktionary, "coöperate" is an actual word! I still feel like pronouncing the second "ö" like in German though.
"English speakers and writers once used the diaeresis more often than now in words such as coöperation (from Fr. coopération), zoölogy (from Grk. zoologia), and seeër (now more commonly see-er or simply seer), but this practice has become far less common. The New Yorker magazine is a major publication that uses it."
It's just the New Yorker being pedantic. It's a fight I sometimes agree with, but there's no way "coöperating" is ever going to become standard--it's always going to look weird to the vast majority of readers.
> If a story has had significant attention in the last year or so, we kill reposts as duplicates. If not, a small number of reposts is ok.
It's not very clear what significant means, but all the previous submissions have 0 or 1 points and no comments.
I think that one problem with dupes is that the previous submission have some interesting comments that are "lost", so if I find a very interesting comment I quote part of it in the new submission.
I reposted the story after receiving email from mod requesting to repost. Your search list shows that I posted the same story five days ago and appear to be the first one. I guess mods are experimenting with certain stories that they consider good but didn't get traction.
Pointing to the five or so posts of this story helps to highlight the fact that New Yorker[1] gets very many duplicate submissions, most of which get very few comments / upvotes.
Some other sites get similar beneficial multiple submissions.
But many sites don't get this and repeat submissions just count as dupes.
Thanks but I'm not looking for upvotes, I just wanted to signal that the dupe detector isn't working very well since it's the same title and url and have been posted only hours before this.
Please see the FAQ. It doesn't count as a duplicate until the story has had significant attention on HN. If we didn't have this rule, many good stories would go unnoticed because there's so much randomness in what gets liftoff from /newest.
Edit: One side-effect of our recent experiments in resuscitating solid articles is that it increases the number of reposts in the story stream. Given the number of comments we've seen about that, it seems users don't like this, so we've begun working on an alternative approach.
Could an attorney chime on on this article? I'm hung over, and a bit fuzzy. Yea--Halloween!
"It’s not that it will be impossible to bring insider-trading cases from now on; it’s that, at a hedge fund, all of the legal liability will now rest with the analysts and traders on the front lines of information gathering—with the initial knowing recipients of a tip. (Incidentally, if you’re a junior portfolio manager, this might be a good time to ask your boss for a raise?"
1. This means anyone, such as a home trader, hires a worker who receives insider financial tips from and passes that information on to me. I can then make the trade, and profit. I am legally protected, as long as the employee didn't tell me about the origins of the tip? The only person liable would be the employee?
"With billions of dollars to be made in betting on the market, whether or not you see cause for alarm in any of this will likely depend on just how scrupulous or unscrupulous you think the average investor is."
Of course the average investor is unscrupulous. For as long as I can remember, the successful investors used insider information to make money on investments. Growing up they openly exchanged tips at church functions. Hell, the only real money my father made in the market was off an insider tip. My father didn't even know it was inside information. He just trusted his new father in-law.
My point is ever successful trader, I tangentially knew, used insider information to make a profit.
My second question to the lawyer. The boys at Google/Bing can see every every IP. They can map every IP to an address, and most likely a name. They probally know exactly who's who in all financial institutions throughout the world.
Could Google/Bing hire an analyst to scrape the data/information are pass that information to a higher up. The "Higher ups" could then make stock trades on this in data. (yes--I know Google only scrapes information in emails for "advertising" data.) 2. Could, if a search engine was combining IP to a name, address, and maybe where an stock trader works. Could The search engine put all that info. together and use that information to buy stocks? They might even call it big data mining for financial gain?
Or, would this senerio be invasion of privacy, and wiretapping?
(I have two questions poorly laid out in this mess of a paragraph. Sorry. I will number the sentences with my final question, as 1, and 2.)
This quote is interesting. I know that in some countries (including my own,) dealing in stolen goods is in fact illegal, regardless of whether or not you knew the goods were stolen in the first place. The onus lies on the buyer of the goods to remove doubts of where the goods came from, which often amounts to simply asking the reseller for a receipt. If you're given one which is bogus, you can claim ignorance and whoever you bought it from would be guilty of fraud as well as dealing in stolen goods.
Now, I don't know what the law says about dealing in stolen physical goods in the US, but if it's anything like the above then why should illegally obtained information be any different? Shouldn't it be reasonable then to ask whoever is dealing in this information to ask for a receipt, as it were?