Why Not Insider Trade on Every Company?
bloombergview.com
bloombergview.com
Example: you are an executive at E Corp and the company will announce its acquisition in two months. You had previously set up planned trades to sell x number of shares each month before then. Because the acquisition is at a premium on the current price, you will make much less money if you go forward with your trades before the announcement. So, what do you do? You cancel the trades.
Was this insider trading according to the SEC? Surprisingly, no! Even though you're profiting from insider information, the SEC rules are such that for insider trading to occur, you actually need a trade.
https://en.wikipedia.org/wiki/SEC_Rule_10b5-1#A_possible_loo...
Martha Stewart did exactly this before her company was acquired earlier this year:
Not viable -- think how many options e.g. Google would have to own on e.g. Microsoft to meaningfully move the needle at Google.
I think you're right overall, though. "Buy exposure to a symbol you are not allowed to trade in." is easy if a) there exists an ETF which you are allowed to trade in, b) you know what the constituents of the ETF are and what their weighting is (trivial), c) you can program a computer to successfully do 4th grade math, d) you are good at trade execution (highly non-trivial).
Of course, the answer to that is to require all Congressmen to put their assets in a blind trust.
How about disallowing them to trade altogether in the first place for as long as they hold office?
The answer is NOT to give them free reign to do it. It's to prevent them from being allowed to choose stock investments entirely. They get enough perks, they don't need free reign over the market.
I agree that public disclosure of their trades is viable, because if they decide to trade based on information they have, the public (whom they _serve_!) should also get the same opportunity.
You can go here and make copies.
Are you telling me that until 2012, for every confidential hearing that American congressman could attend, every budget proposal or allocation they had to vote on, every bill (say on the environment, or regarding corporate or financial regulation) they had to pass, or every declaration of war they had to approve, they were allowed to choose the outcome and personally profit from it?
The only study on the performance on Congressional stock portfolios is from 2004 [1]. Do you know of any post-STOCK studies?
[1]: Ziobrowski, A.J., Cheng, P.X., Boyd, J.W., and Ziobrowski, B.J. (2004) “Abnormal Returns from the Common Stock Investments of Members of the United States Senate.” Journal of Financial and Quantitative Analysis, Vol. 39, No. 4, pp. 661-676. (http://www.walkerd.people.cofc.edu/400/Sobel/P-04.%20Ziobrow...)
"Congress Quickly And Quietly Rolls Back Insider Trading Rules For Itself"
"It was such a national risk that Congress did the whole thing quietly, with no debate. The bill was introduced in the Senate on Thursday and quickly voted on late that night when no one was paying attention. Friday afternoon (the best time to sneak through news), the House picked it up by unanimous consent. The House ignored its own promise to give Congress three days to read a bill before holding a vote, because this kind of thing is too important to let anyone read the bill before Congress had to pass it."
https://www.techdirt.com/articles/20130416/08344222725/congr...
"Still, two major elements of the law remain. Insider trading is illegal, even for members of Congress and the executive branch. And for those who are covered by the now-narrower law, disclosures of large stock trades are required within 45 days."
That's only for staff. The reports for Congress members are still required to be available online. They are here [1].
totally different
This would then lead to the question: am I an insider trader if I am basing my options off of the lack of sales of insiders?
This second case seemed more nutso to me than the first, but both are true -- I've lived them.
I don't know if everybody was covered, but everybody in my group was.
NEVER TALK TO THE POLICE WITHOUT YOUR LAWYER.
then the good trades weren't insider trades?
So in this case you had a sell order planned over the next few months but now you know the shares will increase in value after the date of the scheduled sale so you cancel the sell plan. This is considered legal because you did not use your insider information to actually trade stock only to refuse to trade stock
So it is more effectively the same as deciding not to do what you have been doing every month. It would be impossible to enforce a prohibition against that, as that would effectively be a requirement to sell.
So? That hardly seems impossible to enforce. You just don't allow cancellations unless they are also planned. If you're allowed to schedule recurring sells, say, 30 days in advance (I don't know what the specific rules are), you should only be able to cancel them with 30 days advance notice.
The whole point of the planned trade exemption is to allow trades to happen independent of insider knowledge. If you allow cancellations, you're allowing insider knowledge to impact the trading.
Why would that be impossible to enforce? If you register a planned trade with the SEC you have to follow through with it or pay a fine equal to the amount of money you saved by not going through with it.
Someone starts shorting a ton of Apple stock? That probably means something big is happen at Apple, and it's not good. It's information.
Spoofing as a technique can be used to combat and inhibit other types of trading, and is in some sense an algorithm to 'keep the opponent honest'.
As best as I can tell, the biggest reason that we as a culture are against insider trading is because 'it's not fair'. (happy to read a response that adds more depth to my understanding). It isn't fair, and the people with insider information are going to make a lot of money. But in the process of making that money they bring the information to everyone else. And insider trading incentivizes knowing as much as possible so that you can have an edge on the competition.
This isn't necessarily a problem. As a society, we've decided that we like having amateur capital in the markets more than we want the improved efficiency of allowing use of inside information. It's a tradeoff, and while both options have their merits, society has chosen one way.
I would imagine that information imbalance increases make a market less efficient, not more efficient.
How so? Can you flesh out the scenario a bit since I'm having trouble seeing how this is the case. To me, it seems like if there were no trade prohibitions on insider trading the share price would immediately reflect inside knowledge, thereby protecting amateurs from making investments based on facts that they don't know that others do.
A stock price reflects a weighted average of individual investor's knowledge and their capital.
(Efficient market gets around this by assuming people are cool with not just selling the stock but shorting it all the way until it is as low as they think it should be. People don't tend to bet the farm (or have the ability to borrow funds to bet the farm) like that.)
There's time taken to submit data to a central clearing house and time taken for them to publish it.
Many people may not want you to have a real time feed letting people know what shares they have just sold.
There also exist accounting cycles and hence corresponding disclosure cycles. CEOs can make non related entity trades, mask trades, etc. Seasoned financiers are far smarter than the new entrant. They will find ways to reduce their "downside", and increase their upside.
You always want to ensure that new entrants are not left to the mercy and warm fuzzy feeling of finance experts. The rule is that they can't afford them.
While I agree with that in theory, in practise we see that the rest of the market is so hopelessly skewed in favour of insiders in one form or another it's like a sticky plaster on the stump of a severed leg; just look at the Facebook IPO, or high frequency trading.
One thought might be to partly counteract that with a transaction cost that rises over the course of the 3 minutes.
Not really, amateurs mostly make long term investments, they are not buying and selling based on quarterly reports. The only ones who would be affected by legal insider trading are the gamblers.
If there were 1K inside traders who were the only profit-makers, would the price of a security be more volatile than if there were 100K "outside" traders who all had a virtually equal chance of profit?
I'm pretty radically against copyrights and such but I don't think anyone who wants a stock market can say that a corporation doesn't have the right to put limits on what employees do with information. And the first limit most anyone will put on information their employees are given is "no trading on it" - because the stockholders actually, oh, own the stocks and don't want random people profiting.
So insider trading is just broadly taking stuff you weren't given from work. If you make the situation purely civil, a few companies might even allow this but I don't see as a big selling point for their shares.
For the majority of companies, that wouldn't allow it, if there were no explicit laws against insider trading, profits from it could still be lumped under theft in civil lawsuits.
Insiders can create information as well as trade based on it, so there are very strong reasons for corporations to ensure they and their associates' potential gains from trade are very closely aligned with those of other market participants.
All of this leads to exactly the opposite of what you are hoping for: price discovery. It's just chaos and instability, and probably harmful to the market in general.
Meanwhile, on the other side of the tracks - snatched some swisher sweets? That's a shootin. Sass me while black? That's another shootin. You got a likky stik of collie and minoritous in nature? You going down: hard!!!
I don't believe this is even remotely accurate.
> Meanwhile, on the other side of the tracks - snatched some swisher sweets? That's a shootin. Sass me while black? That's another shootin. You got a likky stik of collie and minoritous in nature? You going down: hard!!!
I don't deal with sarcasm and vulgarity. If you want to make a point, make it politely and directly.
Meanwhile, relatively very few people go to jail for insider trading. The number of cases in the past 10 years is probably in the hundreds, possibly thousands. Compared to hundreds of thousands of drug cases (maybe millions?).
(Except to employ enforcers---but that isn't why they exist. They exist because people believe the fiction.)
I should have been more specific about the intended nature of the comparison I was making.
1. Trade on your insider information quickly, or someone will beat you to it 2. Keep your secrets safer.
It also makes the NSA vulnerable to false planted information. Trading on stolen information means trusting that information.
Did I miss the blank space on the form that requires you to fill in the reason for your trade before it gets executed?
Joking aside, you do not reveal your intentions by executing a trade. Let's look at a hypothetical. Say all of the sudden someone dumps 5% of Apple stocks. Information has been imparted, but this is imperfect information. If you own Apple stock and you are weighing your options, you can't know the real reason behind these trades. If you did know the real reason behind the trades (e.g. announcement of a 1% dip in growth in Q4 2015) you could evaluate what you think that does to the value of the stock instead of trying to reverse engineer someone else's logic.
Another Example: How about knowing that someone will happen in ~2 months time, so you slowly sell stock off over 2 months. How does this impart significant information to the market?
Are you joking here? Let's say, hypothetically, Apple CEO buys a lot of stock today. When you learned that fact, did you learn the facts that motivated him to buy the stock? NO. Absolutely, purely, unarguably NO. Not unless you spoke to him directly and he told you.... truthfully.
This is not a joke. The NSA, or any spy, having access to "all" digital information, can easily differentiate between false and true information, or at least have the opportunity. But you, as an individual, can only act on what is shared directly with you. Making trades does not share any information beyond the fact that the trade was made.
A more charitable (and, as it happens, accurate) reading of the parent's comment is that trading on insider information means revealing some of that information. It's obvious and unarguable that this is not all of that information, but as I've said in other contexts, you're always leaking more information than you think. It's often surprising what can be inferred when a few pieces of information are combined.
We should still discourage and ban it. Outside of what the market as a whole does, there's still the question of who benefits from it. Insider trading incentivizes some shitty behavior and some pretty major principle-agent problems.
Isn't maybe an alternative decentralized news publishing service a better idea? Couldn't the CEO of a company publish their financial news only on their own website at the given publication date? Why is it necessary for these news to be stored in some central news database days before their publishing date? And I mean these as honest questions because I have really no idea what the advantage would be?
And another related question: wouldn't it make sense with today's Internet infrastructure to reduce the interval between earnings reports. Maybe it could even be something like a continous automatic publishing of these company finances. Always when some financials change it could directly be published. That way all investors would at all times have the same information as the insiders, so everyone would be on the same level. Of course some extraordinary news like mergers or acquisitions might still give some people insider information who prepare the deal, but at least the quarterly earnings could not be insider information.
Amusingly it's because of the hedge funds. They want to have a limited list of places to check for news to make sure no one gets there ahead of them.
This is why they were so upset when the Netflix CEO made something public on Facebook -- because they weren't watching his Facebook page for news (but they sure are now!).
The SEC actually has a very limited set of places that you can release financial news because of this.
[0] http://www.theverge.com/2015/7/14/8962433/fake-bloomberg-new...
I wish it were so simple to hand-wave all security risks. Mr. Levine's ability to find a MySQL tutorial was quite impressive, but his dismissal of very real security concerns is childish. It's like saying cars are known to crash, so quit crashing cars. It's so, like, simple!
The thrust of the article seems to be that it was the people in charge of these myriad wire systems who were disregarding the security risks, demonstrably to their detriment. As he states:
"But I feel like part of it has to be that the people in charge of those databases, like me until today, had a disenchanted view of the financial world. These systems didn't hold the nuclear launch codes. They held press releases -- documents that, by definition, would be released publicly within a few days at most. Speed, convenience and reliability were what mattered, not top-notch security."
... which is essentially the refrain for every major, embarassing security breach: speed, convenience, and reliability trump security concerns.
We have year after year of examples of innocuous systems being compromised to form elaborate weapons (at a seemingly increasing rate year-over-year), but security is still not a maximum priority. And the reasons are as Levine notes: speed, convenience, and reliability over security.
His finance audience doesn't want to know the details of the security problems, nor do they need to. However, it's valuable for them to realize how this information is just sitting around on a company DB for anyone who can Google "SQL injection" to steal.
What is with "So" these days. I get that it's helps conversational flow but I regularly now see it as a way to start an article.
Sorry, rant over.
Insider trading is illegal because it takes advantage of one's employer.
You are allowed to use material non-public information to beat the living daylights out of everyone else on Wall Street as long as you don't have a fiduciary duty to the source of the information. This includes doing things like e.g. performing image recognition on photos taken by spy satellites to count the number of cars in WalMart parking lots and thereby arrive at their quarterly sales numbers before they're released publicly. (That was an actual thing that was done.)
[ + ] Edit: Actually, on re-reading this, it is glib but false, in consequential ways. Long story and I've already pulled an all-nighter. Some other day.
It really makes me question the sanity of doing this illegal trading. For as much effort you could do something legal and make money. Maybe not as much but surely without the risk of going to prison.
I'm in that position myself. I've enough attacks and some 0days that I could retire off a rather small bit of work (I discovered one guy making $30k/mo recurring off of an amateur attack). Instead, I'm trying to start a security company. It's loads more work and probably not as much reward, at least easily.
In fact, it would not be hard to find people where you might say the opposite: they're insane for not being a criminal.
I think the sucker at the table is the amateur day trader who thinks they can out-smart the market, but really they are gambling.
On the other hand spotting an undervalued stock and buying it and holding for the long term, especially with a portfolio to protect you isn't too suckerish and should be quite immune from whatever the insider traders and high frequency algo guys are doing.
Sigh.