Insider trading is not real buy-side demand pricing information because the insider (typically) intends to sell as soon as the price pops, once more market participants have been pulled into the trade because it's going up -- key knowledge the insider knew the market did not.
Markets as a price discovery mechanism relies upon all participants having access to the same information. Insider trading clearly breaks that fundamental rule.
Insider trading is not illegal because insiders possess knowledge the rest of the market does not.
Insider trading is illegal because it creates a false perception of unfairness among less sophisticated market participants. (There are other decent reasons too, Matt Levine has written about this extensively too. Yours isn’t one of them)
> Markets as a price discovery mechanism relies upon all participants having access to the same information. Insider trading clearly breaks that fundamental rule.
This only makes sense in a context where all parties have access to equal resources, but that’s not true. A hedge fund paying visa for transaction flow, or flying spy planes above a factory to track production will have more information than other participants.
Whether or not insider trading should be illegal is a hotly contested topic among economists.
>It doesn't really matter why, it is, and for good reasons
Would you like to share the good reasons why it doesn’t matter?
It also creates incentives for insiders to act perversely to profit from asymmetric information, including acting with the intent of creating less accurate pricing at a particular time in order to create trading opportunities for insiders.
Suffice to say the dominant trend in crypto markets is not rapid convergence on a relatively stable price...
That doesn’t make any sense, prices go in both directions. If price goes up, there’s no harm to people who the insiders may have some fiduciary duty to.
> It also creates incentives for insiders to act perversely to profit from asymmetric information, including acting with the intent of creating less accurate pricing at a particular time in order to create trading opportunities for insiders.
In the US that’s just called “wire fraud” and not “insider trading”.
Of course there is. When prices go up, insiders profit at the expense of shareholders who sell to them. In the absence of insider traders, non-insider shareholders collectively achieve better returns; ergo they are harmed by the presence of insider trading on positive or negative information.
(The only time it wouldn't be the case is if the prices move in the opposite direction to the one the insiders are expecting due to some other unanticipated development which is far more significant than their information advantage)
> In the US that’s just called “wire fraud” and not “insider trading”.
Much easier to prove the insider trading in the run up to a profit warning than prove an entity was intentionally mismanaged to create that opportunity and its earlier predictions of success were fraudulent and not just incorrect.
US regulators would rather specialist companies with the fastest algorithms and connections to process corporate announcements reap all the benefits.
However, because it’s 2022 and we have the internet and all I’m not sure it really makes sense to focus on specific market centers instead of the market as a whole.
Of course HFT makes this far more complicated so it’s difficult to come up with a clear answer in either direction.
The Clean sweep study (https://zero.sci-hub.ru/5176/a262ebfad2436662b8fb5d7362ff297...) seems to suggest that ISOs have a greater impact on prices and add more information to markets than “regular” orders.
“Latency” just means that the future isn’t priced in, which results in less accurate pricing.
Insider trading adds to consensus knowledge.
It’s a handful of connected individuals in either case.
But I can't, without bribing executives, hacking into corporate servers or being at the negotiating table myself, front-run MNPI.
That difference is kind of the point behind free markets.
I struggle to wrap my head around someone thinking insider trading being a net positive. The only justification I see is if said person would like to themselves profit off of MNPI they have access to without fear of reprisal, in which case you should consider a career in the US senate.
> Because I could, given enough experience in the industry and money to have servers close enough if it's highly time-sensitive signal, compete with said funds and specialists.
What benefit does the existence of this competition provide as opposed to insider trading? Why do you think that artificially enabling such an industry is a net positive?
That's like playing poker with someone sitting at the table who's connected to the casino's management and knows the order of the cards coming up. We'll never come to an agreement that this behavior should be accepted and is beneficial for the game.
You’d prefer for whatever company has the fastest algorithms to process corporate announcements to reap 99% of the $$$? How is that any better?
Edit: algorithmic option is available to anyone but insider trading rewards a select few "insiders". No meritocracy.
So what? How does artificially helping algorithmic traders help society at large, or even just market participants at large?
This is just creating a worthless industry that could be entirely replaced by insider trading.
>>Self taught programmer.
>> Learning CS fundamentals, Algo + DS alongside leetcoding as I’ll fully switch to a software dev career when I can land a solid programming job.
>> always enjoy talking to people - helping one another out, bouncing ideas.
---> 'helps another out' by shitting on someone for meaninglessness when he doesn't produce formal credentials
Bravo brother!
Also, which part of my comment is shitting on some one? Saying something casually isn’t shitting on someone. There has to be some thing like bad faith involved. Like what you do including here.
So you really meant to just say "this doesn't mean anything" rather than "You're anonymous. This doesn't mean anything." Turns out your comment was just another disingenuous "heads I win, tails you lose" where by your own self admitted stance, it would have also not meant anything if they weren't anonymous and actually did provide credentials (despite classes OP called for actually being a part of getting those credentials).
> I write my comments for me.
Why would I answer your questions. You said you write your comments for yourself, that means the question is for yourself, not me.
It’s not illegal for me to pay Visa and Mastercard for an exclusive deal to access transaction flow and trade on the basis of that information. I will in fact be trading based on material nonpublic information, but not in the sense the law forbids.
>The Securities and Exchange Commission announced today that it charged Bonan Huang and Nan Huang (the "Defendants") with engaging in illegal insider trading on the basis of material, non-public information about the sales of predominantly consumer retail corporations.
>In its complaint filed in the federal court in the Eastern District of Pennsylvania on January 21, 2015, the SEC alleges that the Defendants worked for a large credit card issuer as data analysts tasked with investigating fraudulent credit card activity. While employed there, Defendants searched their employer's nonpublic database that recorded the credit card activity for millions of customers at numerous, predominantly consumer retail corporations. The Defendants conducted hundreds, if not thousands, of keyword searches of this database. These searches, which were not done in furtherance of their employment duties, allowed the Defendants to view and analyze aggregated sales data for the companies they searched. The complaint further alleges that, in a breach of their duty to their employer, the Defendants made profitable securities transactions on the basis of this material, non-public information in advance of the public release of quarterly sales announcements by these companies.
Those guys did a bad thing because they deprived their employer of the opportunity to profit from this data.
But it's certainly not for the other participants who are getting rolled over by insiders. Why play a rigged game?
And it's definitely not beneficial when the insider has the active ability to influence the price of the asset. If an executive could make money by shorting his firm's stock, the optimal strategy for every executive would be to sabotage their firm, while shorting its stock.
The latter two reasons are why it's illegal, by the way. It undermines confidence in markets, and it creates perverse, value-destroying incentives.
This only makes sense if you think of markets as gambling. Otherwise, other participants are always getting rolled by parties with better research, or perhaps just a faster internet connection.
> The latter two reasons are why it's illegal, by the way. It undermines confidence in markets, and it creates perverse, value-destroying incentives.
This doesn’t stand up to the most basic scrutiny. Sabotaging your publicly traded company is illegal whether or not you also engage in insider trading, what benefit is there to be had from criminalising the same thing twice?
Or if you think of markets as a way to encourage investment into the economy. Why should I invest if insiders are going to be scooping up a lion's share of the windfalls?
Anything that reduces the ROI on my investments creates an incentive for me to not invest.
> This doesn’t stand up to the most basic scrutiny. Sabotaging your publicly traded company is illegal whether or not you also engage in insider trading, what benefit is there to be had from criminalising the same thing twice?
1. Without these incentives, you have far fewer reasons to behave unethically and illegally.
2. You usually can't tell the difference between accidental incompetence and malicious sabotage. Being able to do sabotage under the guise of incompetence, while having a profit motive is a colossal conflict of interest, and any system that encourages it is going to produce a lot of poor outcomes.
3. When the executive doesn't benefit from either incompetence, or sabotage, and their rewards are based on good performance (stocks go up), their incentives are aligned to chase good performance.
Better price discovery is a good thing, but in this case, the juice is not worth the squeeze.
It's not a large tax on each individual participant, but it's not magical free money.
I think the crucial detail you might be missing here is that markets are not zero sum games.
It's true that markets aren't zero sum games, but some insider extracting value from a stock in this manner does not create value for me.
And the third point that I made very clearly creates incentives to turn it into a negative sum game. Good luck proving that Bob ran the company into the ground (and got rich doing so) because he's a crook, rather than just an idiot. You can't.
(You also can't make running a company like a well-intentioned idiot illegal.)
Insider trading doesn’t make this any easier to prove. Bob can just start drinking or doing drugs before running the company into the ground, now his friends and family have a solid defense against any insider trading claims.
Bobs drug problem isn’t material nonpublic information, but it sure as hell explains why everyone around him started shorting the company.