These guys are like the kids who saw the Tide Pod challenges and decided to actually eat the pods. I bet insider trading is not as fun when you're unemployed and bankrupt.
Not just unemployed, likely unemployable by any reputable company in the industry.
Also, good on you for having integrity, but honestly what you say is too much for the average person to be tempted with. Does anyone have a solution for lowering that temptation and making these scenarios less likely?
In practice. The world is unfair, and retail investors must compete against all kinds of people with unfair advantages.
If insiders could legally trade, then the ability to profit off insider trading would go down.
The argument that insider trading should be banned because it is somehow disproportionately unfair is quite weak, the argument that it creates an impression of unfairness is a much stronger one.
I personally don’t believe it is a particularly good argument, but it is certainly the strongest version of the argument against insider trading.
Auditors are a good example. They have privileged information and are responsible for the fairness of financial information / disclosure. Their incentives are already complicated by the compensation structure, i.e. the company they attest for pays their fee and ultimately decides whether they will work together in the future.
In this instance, an abolishment to insider trading regulation would ultimately undermine trust in the financial reporting system. The auditors could potentially place bets on their engagements and negotiate results based on their interests. Impartiality would be compromised. There are safeguards in place currently, penalties for insider trading are part of the remedy.
This is a very odd straw man.
What you are describing would still be a crime in a world in which insider trading is legal.
I think you are the one who didn’t put much thought into this.
This only makes sense in a world where regulators can effectively prevent insider trading, that’s not the world we live in though.
Was it fair when Enron was valued at $70B? Would the situation have been less fair had insider traders with more information pushed the prices down earlier?
Insider trading doesn’t cost anybody anything, it simply allows for more accurate pricing which benefits everybody.
There exists little political will to legalize insider trading because it would be hard to sell to a public that doesn’t even understand why stock markets exist. To the average person on “insider trading” is just bad stuff evil rich people on wall street do.
In reality the arguments in favor of banning insider trading are actually quite weak, usually relying on very vague ideas of fairness and public perception.
But the idea of “fairness” in markets is an illusion anyway, even without insider trading there will always be those with more information. Someone could follow corporate executives to restaurants, eavesdrop on their conversations and trade on that basis. That wouldn’t be illegal insider trading, would it be fair? I personally believe it would be just as fair as illegal insider trading.
Legalizing insider trading does nothing for fairness.
The SEC does catch insider trading. And yes, they could do better.
Your morals are showing. Just because you can justify it doesn't make it so for most.
> Legalizing insider trading does nothing for fairness
But it does, it increases information available to the public.
> But it does, it increases information available to the public.
A little less pedantically for those who enjoy repetition and are prone to dogma, more information is not always better. In this case, as is in general, there should be some qualitative analysis, e.g., the type of information, how it was gathered, its method of distribution,...etc.
On another note, the Efficient Market Hypothesis (EMH) is not reality. I say this because you have used several core tenets in your discourse repeatedly. I acknowledge the high probability that I am most likely dealing with a college student fresh out of introductory Macro. Yes, the class is interesting and exciting. Here is a lesson, EMH is a model used to help us reason about the market. Its an abstraction based on an abundance of simplifying assumptions, ceteris paribus. Anybody who does not disabuse themself of this notion that EMH follows reality is a fine and perfectly capable person who may make a lot of money some day (fingers crossed), but they don't really add much to the conversation.
Finally, unrelated to the aforementioned, yet I don’t care to answer any more of your responses to my posts, so I’ll add this here: look up the ‘straw man fallacy.’ I tend to shy away from using biases and fallacies in general discussion, they seem to miss more than they hit. However, my distaste doesn’t stem from those who use them effectively to facilitate when they hold relevance. No, my distaste comes from those who use them as the argument itself. It is lazy and adds nothing to of value, much like allowing insider trading. If you can explain what makes my example of financial auditors' a 'straw man', especially when it was solicited by a general question asking for examples, then you can claim you 'dominated the conversation' / won or whatever this is.
https://en.wikipedia.org/wiki/Straw_man - here is a link, figure it out.
Insider trading has an institutional cost: it's corrosive to trust in the market. Retail investors are less likely to make optimal investment decisions if they think that insiders are lurking around every corner. That trust is further diminished if retail investors believe that insiders are not just investing based on insider information, but speculating on higher-order instruments.
It's perfectly fair to note that our current regulations against insider trading aren't ideal, and that the SEC only catches a tiny fraction of all insider trading. But the threat of enforcement does serve as an important root of trust in the market, and removing it is unlikely to serve individual investors well.
But the reality is that there are insiders lurking around every corner. The argument is essentially that we should seek to actively mislead retail investors instead of simply acknowledging this fact.
To me that feels dishonest.
I think it's my civic duty to not only inform others of that fact, but also to advocate for better enforcement.
> I think it would be dishonest to do so actively
That is what the government is doing via legislation.
Every trade has to be disclosed. There isn't a block-chain involved, but their is an e-paper trail. We are on a technology forum in a time where ten people could probably put together a domain model that tracks potential conflicts based on peoples trades, google contacts, and linkedin profile. And any person who traded on insider information in the past probably leaves a pattern.
Good enforcement is impossible without subjecting anybody trading stocks and everybody they know to a completely unprecedented level of surveillance. This would have to go far beyond the wildest Snowden revelations.
Perhaps not completely impossible in theory, but absolutely infeasible in practice. Building such a system would also be likely to result in far greater chilling effects on the markets than insider trading ever could.
Why? Just look for a pattern of abnormal returns. (Hint: the SEC does this.) It's much easier to check for insider information after the fact than it is to profitably trade on it.
Does it work? (Hint: no)
> It's much easier to check for insider information after the fact than it is to profitably trade on it.
This is only true for the least sophisticated insider traders.
A market changes according to flow and distribution of public and private information. The more publoc information, the more accurately priced the stock. Insider information increases public information indirectly through trading said stock.
From a cultural standpoint, many people do not trade on insider information because it is seen as unfair or immoral. A number of people abstain because it is illegal. Some do trade based on self interest and the disproprotiate personal gains to risk involved.
Nowhere, in any of this is the quality and manner of disclosure. Ultimately, it just creates another financial game where people race to see who can get the information quickest.
Needless to say, the systems of reporting in corporations would adjust and the largest share of gains would be made by those who have large holdings of stock. At the same time, it takes away a measure of enforcement and adds traders who were deterred by laws and morals.
Is it immoral to trade on material nonpublic information you happened to overhear in a restaurant?
Is it likely for you to get caught for insider trading? Probably not.
Especially if you're Joe Blow and you make 10k on this. If you are Joe Blow making 10k also means you did not have a lot of "play money" to act upon overhearing some random conversation. Or you do but didn't trust it fully (how did you know it was 'material' and not just some guys at a business lunch 'boasting' to each other?) and just did it to test waters or have fun.
The larger the sums get I would argue the more likely it is you will get caught because it means you are probably much closer to the actual information than meets the eye. Or it gets caught in some filters based on amount and such that someone starts looking at etc. If you really just completely randomly overhear something like this, how do you judge that it is 'material'? Is someone going to bet his entire savings account on a completely random encounter of overhearing Bill Gates and Warren Buffett discussing something 'material' over lunch and they are in earshot range? And here we are talking major celebrities that probably even Joe Blow would recognize and judge as 'probably material'.
You know what? Even though it's still immoral I totally wouldn't judge Joe Blow betting $100 to make $10.000 on that and put it on the mortgage. He probably bets that same thing on some Superbowl weird odds bet each year and looses.
More likely? Joe Insider knows exactly when Company X and Company Y are gonna announce some multi billion dollar deal because they've been in talks for months and they work in BI to get the numbers for this deal to them and things seem to be getting close. Get a few trades in with the bonus money or proceeds from the RSUs vesting. Immoral act to make 100k of RSUs into 10 million and be set for life.
>Is it likely for you to get caught for insider trading? Probably not.
Overhearing something in a restaurant and trading on it is not illegal insider trading.
For the purposes of this conversation it would be useful for you to have the most basic understanding of what constitutes illegal insider trading.
There is no statutory definition of “insider trading”. As defined by the courts, it refers to purchasing or selling a security while in possession of material, non-public information concerning that security, where the information is obtained from a breach of fiduciary duty, or a duty arising from a relationship of trust or confidence.
Obtaining the material information by way of a breach of duty or confidence is the key to an insider trading violation, but after decades of court rulings, it is almost impossible for a court to find that a duty was NOT breached in an insider trading case. Some duties are obvious – the CEO of the company, the CEO’s assistant, and every other employee owe a fiduciary duty to the company and if they use, or disclose, material non-public information, they are liable for insider trading, often even if they didn’t trade themselves.
Over the last 10 years, the SEC and the courts have greatly expanded this definition, to include trading by individuals whose “relationship of trust” is so remote as to be non-existent, but that discussion is left for another day
Would he not count as "every other employee" in the above for some reason? He overhears a conversation between the CEO of his company and another company about a big deal while he's say fixing the heating in the conference room? Nevermind the likelyhood of that scenario and the really bad practice of discussing such matters in said conference room while he's there (or in a restaurant to go back to the other example but then said janitor would need to frequent the same one as the CEO of his company, which is also an unlikely scenario ;) )
For example a mask manufacturer. They might have a relative in China who shares information about the outbreak of a new virus. Manufacturer uses this completely legal information to produce a ton of masks and makes record profits off the sales because they're right. But the public benefits as well because there are actually masks to purchase.
And another example are whistleblower payments. We have no problem giving whistleblowers millions of dollars for uncovering fraud because the cost is far lower than the benefit.
Like you could buy put options to set up a leveraged short position, take all the company's money, set it on fire in public(or make a stupid acquisition so you can't easily be sued by other shareholders), watch the stock price drop in a predictable manner, and profit from the predictable decrease in equity.
Sort of like how you can't buy life insurance and then immediately commit suicide and still get paid out.
What you are describing is an entirely different kind of misconduct than “insider trading”.
Such activities would be criminal regardless of insider trading. What difference could it possibly make if insider trading was legal?
Should we maybe add more laws to forbid such activity in different creative ways, so instead of being doubly illegal it would be triply illegal?
Crazy.
Killing your neighbors with a gun is illegal in both France and US? Here in France, one cannot purchase a gun. Guess what happens when you make gun sale as easy as possible?
Oh but people can own gun, they just should not use them illegally! Right?
K-mart could stop marking everything "on sale" 100% of the time and make the regular price the discounted price, so people don't feel like they're getting a good deal. Then their sales collapse and they go out of business, because consumers are robots with predictable emotions.
Or the board could look for the absolute worst CEO they can find, thinking to themselves "This guy will surely bankrupt the company if we give him control", and then have all the written documentation being reasons why he's a great CEO and put out press releases bragging about him.
If you look at executives loading up on put options and say "surely that proves intent", then they'll instead call up their old Harvard buddies at Goldman Sachs and tell them all the reasons the new CEO's going to be great. They'll take the hint and load up on puts on his behalf, then 10 years later give him a cushy job at the hedge fund.
Maybe they wouldn't do it to a successful company. But if a company starts declining, has a couple bad quarters... the executives start looking for an "exit strategy", and you just legalized a whole class of them if they accelerate the decline as long as it's too hard to prove intent.
If you try to ban specific examples and legalize the general principle, they'll spend years of their life arranging for companies to be bankrupted in ways that are hard to prove illegal. There'll be documented "good reasons" for everything, but despite that they will be millionaires and their companies failures.
You can't look at the most obvious case and say "we'll just ban that". It's not how these people work - they are reading the law and planning around the edge cases.
There is a global feed of press releases that companies release into, and the average HN commenter is incapable of distinguishing frauds from real better than anyone else. The executives that make these press releases use different language that doesn't describe it as fraudulent, and this makes it non-obvious.
If the "trading profit" is the only signal you have, I'm sure Goldman Sachs can come up with a way to make it less obvious than "buy lots of short-term expiring put options on your own company". You can't look at only the obvious case - you have to look at all possible things all finance people can do and rule out any possibility of profiting from a downwards movement that was engineered. Otherwise, they will profit from the gaps in your ability to detect them.
In order for something to be a crime, it has to be proven "beyond reasonable doubt". Say with 90% certainty. That is, 2 bits of certainty. But you can make a trading profit while leaking 1, 0.5, or 0.1 bits of certainty. It is extremely difficult for non-specialists to detect a trade pattern based on a leak of 0.1 bits of certainty.
With the exception of Congress of course.
Reverse insider trading is also fine, you can announce buybacks right before a preplanned stock sale.
It would be simpler to say if you aren't friends with someone invited to Epstein island you aren't allowed to insider trade but the plebs would get uppity.
Banning Congress from making stock trades has broad bipartisan support[1]. Absent any evidence that the person you're responding to doesn't support a Congressional ban, it's probably safe to assume that they do.
[1]: https://thehill.com/homenews/news/588630-76-percent-of-voter...
"What’s odd is not that insider trading law is about theft; what’s odd is that it almost looks like it might be about fairness, and that people think it is."
"One thing that I often say is that insider trading is not about fairness, it is about theft. Whenever an insider trading case is announced, the prosecutors will make a little speech about how financial markets have to be a level playing field, and how the insider traders are cheaters who got the answers before they took the test, but it is all nonsense. Financial markets are not a level playing field; some people will always have faster computers or better resources or more money to spend on research than others, and they should have incentives to find out information that other people don’t have. But more important, the level-playing-field stuff is just not the law. The law doesn’t say that any time you trade on material nonpublic information it’s illegal. The law, to oversimplify a complicated area, makes it illegal to trade on material nonpublic information that you obtained in violation of a duty to someone: It’s illegal for corporate executives to trade on corporate information for their private gain, or to give that information to their buddies in exchange for a personal benefit, or for outsiders to obtain information in confidence and then betray that confidence by trading on it. The real issue is never whether the trading was unfair to the people on the other side; it’s whether the information was misappropriated from its rightful owners."
So how do you make sure the rightful owners have access to the same information?
https://www.bloomberg.com/opinion/articles/2019-03-13/you-ha...
This is wrong. Being better than someone else doesn't make the playing field unlevel.
"The basketball court is level. The better basketball player simply has more money when it comes to financial markets."
Is a football field unlevel if team A spends more dollars on their lifting program?
> This is wrong.
P.S. Flat out telling people they are wrong is not a great way to facilitate good faith discussions.
It's the disparity in revenue information, chunked into quarters, that causes the problem. Some people feel entitled to have early access but that's the problem.
I think you underestimate the “average person”. Most people basically want to be good. Everything works better when that is the case — basic game theory.
You see the punishment / pressure about unfairness start in early childhood. You see it in the infrastructure where this is overwhelmingly the case (e.g. shops with unguarded back entrance/exits) vs where not (armed guards outside the shops).
And of course the news (cf the current HN conversation on that topic) focuses on the exceptions to the rules because, on an evolutionary biology* basis we’re always learning and reinforcing on the normal case so we are interested in the exceptions.
* meant loosely…most EB is fanciful.
I’m sure it happens all the time, we just heard about the ones who got caught.
Personally I would never do it as I can make much more by keeping my job and the field I’m in is all about ethics and integrity. I would rather hustle with contracting or job shop to get a raise if I really needed the money.
Tech ( corporate ) pays well enough that anyone with reasonable cost of living and lifestyle shouldn’t resort to extreme desperate measures. The rest is greed. The fact these people have money to play with stocks already shows they’re much better off than the average person.
Isn't the status quo doing a sufficient job?
The temptation may be there, but it's abated by the downside risk of fines, prison time, and unemployability.
We need a modern day equivalent of a cash register.
The average person is basically a decent human being, so this is absolutely fine. It's the outliers that are the problem.
> These guys are like the kids who saw the Tide Pod challenges and decided to actually eat the pods. I bet insider trading is not as fun when you're unemployed and bankrupt.
And in jail.
There are probably more lucrative and/or less risky ways of making illicit money.
But capitalising on insider knowledge is generally okay from the SEC's perspective.
They wouldn’t have done if it they expected to be caught.
Most insider traders are never caught, everyone eating tide pods gets sick.
And no, it’s really difficult for SEC to detect any but the most basic forms of insider trading.
Try to apply some adversarial thinking and envision a situation where you want to insider trade, but don’t want to get caught.
>Try to apply some adversarial thinking and envision a situation where you want to insider trade, but don’t want to get caught.
Criminals take great efforts to not be caught and still are.
Insider trading is not like other crimes.
Consider the reasons why it is criminalized, which have been discussed elsewhere under this post.
The main point is you can't buy or sell securities without identifying yourself. So when someone opens a new account and buy out-of-the-money call options that expire a few days after an earnings announcement it's not hard for the SEC to flag all those.
Then all they have to do is look up that person and see if they have any connection to the company. They can look at who you are connected to on LinkedIn, who you live with, where your family is employed. Then they come to that person and ask them a question that seems innocuous "Have you ever discussed Company X with <insert name>". If you lie, then you've already committed a felony when they get your text records or email or Whatsapp.
"Hmm. This guy just bet his entire account on a crazy bet and won" or "Hmm. This guy flipped a coin and it came up heads 20 times in a row."
I have no idea if it would work, but having a few years of making similar trades (some winners/some losers) likely helps stay off the SEC's radar.
A track record of buying and selling similar options in similar amounts is much more explainable than only contributing a few thousand to your Roth IRA by buying ETFs, then suddenly making a few hundred thousand on your first options purchase that so happened to be in a single company that a LinkedIn contact works for.
By the time the SEC is knocking on your door asking questions you're already screwed.
Executing an inside trade profitably and secretly is difficult. Catching it ex post facto is easy. (The SEC scans for unusually profitable trades and accounts. These systems are thorough, clever and effective. When they're updated, they re-run back data through the statute of limitations.) This is the P != NP element of insider trading that outsiders miss.
It's why inside traders are usually unsophisticated. They assume Wall Street is doing it. That they're getting the short end of the stick. So they run out and buy out of the money calls or whatever through their nephew's account and get nailed.
> It's why inside traders are usually unsophisticated
Insider traders who get caught are usually unsophisticated.
Surely if they, by (supposed) conjecture, figured that the company might do better if people are more dependent on phone calls in lockdown (a reasonable assumption), and there was no evidence to the contrary, how from a technical basis would it look any different from someone simply going "oh yeah my company looks like it's gonna do great, I'd recommend getting some shares"?
I wonder if this investigation would have had teeth if it had relied on coffee shop conversations as opposed to digital media.
I admit though, I watched too many spy movies and TV shows
Also worth noting there have been times I've thought the price should go up and it went down, and vice versa. While I have a good view into financials (and believe I would have made money insider trading, on the whole), it's not complete enough to warrant something like threats, blackmail, etc.