Talk:Insider trading
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Is this entirely based on the situation in the USA, or generally applicable?
The rules are not uniform round the world. Reporting standards, practices and loopholes vary considerably among jurisdictions.Two16 13:36 Jan 11, 2003 (UTC)
Two justifications of laws against insider trading were recently posted on Wikipedia:Help desk. I quote them here so I can demonstrate the kinds of questions that I'd like to see answered in this article:
First we have
- Information wants to be free but you can make lots of money if its not freely known. The game is rigged towards those with connections. The laws against insider trading are lip service paid to honesty.
"Information wants to be free" is an odd claim if you take it literally; I've certainly never seen, say, a volume of Britanica risk life and limb trying to escape from a totalitarian country. Presumibly this "really means" something else, perhaps that people want information to be free, or that information "naturally" replicates itself frequently. Nothing too big seems to follow from these, especially the second.
"The game is rigged towards those with connections" is most certainly true. Not just in financial markets, but in terms of getting a job, being asured of having someone to take care of you when you're old, and in most other areas of life. The question is: is this always a bad thing? Not everyone would answer yes, so a more careful investigation of when it is a bad thing is needed.
Also, I see no necessary connection between insider trading laws and "honesty". The only reasons insider traders have to be "dishonest" (i.e. have to hide the truth) are the laws that make their activities illegal, and the general consensus that they are somehow immoral. Without the current sorts of laws and social pressure, people could engage in all kinds of insider trading perfectly "honestly".
Next we have
- the claim that markets are efficient allocators of resources rests on the condition that people have equal access to information (some claim that markets would be the most efficient way to allocate resources if all people had perfect information). When you have insider trading, some people have fundamentally different access to information than others, so the market cannot work efficiently.
Obviously this can only be proved for a particular technical definition of efficiency, and given particular assumptions about how the market works. Unless you're going to mention what kind of efficiency this is (so other questions like "efficient for whom?" and "is this actually a very valuable kind of efficiency?" can become meaningful), an efficiency argument is complete gobledegook. Also, it is clear that the ideal of "perfect information" can never be realized in a real market, so your argument had better take account of different degrees of information freedom.
--Ryguasu 01:40 Jan 11, 2003 (UTC)
The legal justification for making only certain types of insider trading illegal (not all of it is banned) is precisely in the breach of loyalty and trust. The management of a company is hired by the shareholders to earn profits for the shareholders. If the management uses the resources of a company (e.g. inside information) to personally profit to the detriment of the shareholders (who don't have the same access to that inside information), how is that conceptually any different from embezzlement? --Stephen C. Carlson 03:13 Jan 11, 2003 (UTC)~
Stephen, could you clarify which of these I am to read from your comment:
- Insider trading is only illegal when it is detrimental to shareholders. (So if a CEO benefits from an insider trade but the shareholders are not "harmed", then would not be illegal.)
or
- The sorts of insider trading that are illegal are usually detrimental to the shareholders.
or
- The sorts of insider trading that are illegal are always detrimental to the shareholders?
In either case, how am I to read "detrimental to the shareholders"? Do courts of law have an established principle for this? "If the stock price drops" seems a little simpleminded. --Ryguasu
I think it would help things if you would answer my question first and not get bogged down on side issues. Do you consider the conversion of the company's assets for personal gain (e.g. non-public information that one has been entrusted with, in the case of illegal insider trading) a form of embezzlement? If not, why not? Stephen C. Carlson
64.229.10.253 At the help desk I gave a snappy answer to a complex question. It's not so shallow if you remember where it was placed.
Information wants to be free but, you can make lots of money if that infomation is not freely known. ['its' replaced for clarity]
- Stockmarket game is played by large numbers of people, any information widely known is adjusted for by the market. Widely held information is valueless in terms of market advantage: having foreknowledge of market movements is often times lucherative. Outrangeously so if its the right information is held closely enough. Think dotcom bubble economy. Timing is important. Information will expire in terms of market advantage.
The game is rigged towards those with connections.
- Do you think this statement is (npov)?
The laws against insider trading are lip service paid to honesty.
- Its all about the transparency. Many folks at Enron made out like bandits trading in stock that they knew was worthless (cause they were the ones running the scam). If the information will cause a share price rise, laws are vitually uninforceable as resonable doubt can be manufactured in any rising price before the trades are made. Falling markets are trickier: if Martha had only sold half her stake, she would have a pretty good defence against charges of insider trading because she 'reduced her exposer to bad news while still maintaining a postion'. A pretty reasonable story of astute finacial judgement don't you think. Remember Martha already knew the bad news: its just harder to disguise insider trading if share prices are going to plummet.And she was greedy. Who knows why she did what she did?
This arguement against ineffective laws surrounding insider trading is a variation on a theme by Paine: If the laws are full of loopholes, we are doubly cursed because not only do we suffer the crime that we legislated against; but, we suffer an expensive, intrusive, regulation and we do it by our own hand.
I'm suprised "Information wants to be free.." didn't send the cliche alarms ringing. If you're not familiar with phrase, you have just recieved a common, frequently mutatingmeme.
Now that I'm here and been insulted. I think I might read the article;-) Two16
Moved pov material from the main article:
- Perhaps the most common moral argument for condemning at least some kinds of insider trading is that the practice is unfair, especially to outsiders without privileged information. Rarely, however, is it clarified what sort of fairness is involved. Rarely is it noted that alternative conceptions of fairness might produce different views on insider trading. Restrictions on insider trader must necessarily restrict certain people's rights, which might be perceived as unfair by those who find individual rights of prime importance. Rarely is the level of unfairness involved here compared to other kinds of unfairness that might be said to exist in the stock market, especially for those who don't have the resources to participate.
- Some arguments for prohibitions on insider trading argue that they make the market more "efficient" in one way or another. ...
If it goes back in, the criticisms should reflect the specific kinds of insider trading that are illegal, because not all kinds of insider trading are illegal. Also, there should be no insinuation that the SEC has not given thought when making some kinds of it illegal. Stephen C. Carlson
I'm glad Stephen removed my POVful rant. The follow up on the NPOV efforts, I'm wondering if the following isn't POVful:
- Illegal inside trading occurs when the insider violates a fiduciary duty? or other relationship of trust and confidence in the process. Thus, some insider trading is legal and other is illegal, depending on whether there is a breach of trust.
Are "fiduciary duty", "trust", and "confidence" all technical legal terms? If so, this may be a NPOV statement, although the technical nature of the terms should be clarified, and a summary of what these terms mean in Average Joe's English should be provided.
- I'd have to look all of my notes on the topic up, but yes fiduciary duty, confidence, and trust are all legal terms. Basically, a "fiduciary duty" is the duty that the law imposes imposes on all officers and directors of a company to act in the best interests of the company. There are two types of fiduciary duty: the duty of loyalty and the duty of due case. Of these duties, insider trading is concerned with the duty of loyalty. Note that his fiduciary duty does not apply to all employees of the company. The issues of breach of trust also apply to the attorneys, accountants, assistants, and other people the officers hire who have been entrusted with confidential information. Stephen C. Carlson
If these are not meant as technical legal terms, then this seems to imply that the SEC is omniscient and omnibenevolent in deciding what trades to make illegal. Among other things, it implies that it is clear as day how much trust in "the process" is required, whose trust must be ensured, how this is to be accomplished, what "the process" is to accomplish, who is supposed to benefit, etc.. --Ryguasu
- Neither the SEC nor any other govt. agency is omniscient and omnibenevolent -- that's why there is a right to a jury trial. "In the process" is nothing mysterious just my terminology for "by virtue of the insider trading" without getting too repetitive. Stephen C. Carlson
Information wants to be free
- I'm not sure if this is what the author meant, but this could be a reference to the theory of rational expectations, which says that (at least in securities markets) the prices will converge to the same limit as if all traders had access to all information. To put it simply, if you have inside information, you cannot benefit from it without partially revealing it, because others can observe how you trade. CyborgTosser 20:28, 26 Aug 2004 (UTC)
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what are the regulation related to inside trding
"Ratios" section removeal...
Note: I removed this secction because, as written, it's more confusing than it is useful, IMO. It seems like it contains an interesting point (executives often don't acquire their stock on the open market) so if somebody can figure out how to reintegrate it that would be good. --Robert Merkel 00:47, 8 Feb 2005 (UTC)
Ratios
Why does insider selling always oustrip buying by volumes? For example: (2004)
- "Month" "$ Value Sells" "$ Value Buys" "Sell / Buy Ratio"
- DECEMBER $7,414,582,159 $464,231,802 15.97
- NOVEMBER $12,606,254,699 $710,053,742 17.75
- OCTOBER $5,080,665,973 $306,684,065 16.57
- SEPTEMBER $6,479,040,607 $463,166,914 13.99
By being awarded options, many executives don't have to purchase shares on the open market in order to increase their holdings. And option exercises (stock is bought, or given by company if it's employee stock options) isn't included in the stock buy number. However all option exercise have to be reported to the SEC on a "form 4" since the Securities Exchange Act Of 1934. And could theoretically bring down the sell/buy ratio. ue Sells" "$ Value Buys" "Sell / Buy Ratio"
- DECEMBER $7,414,582,159 $464,231,802 15.97
- NOVEMBER $12,606,254,699 $710,053,742 17.75
- OCTOBER $5,080,665,973 $306,684,065 16.57
- SEPTEMBER $6,479,040,607 $463,166,914 13.99
By being awarded options, many executives don't have to purchase shares on the open market in order to increase their holdings. And option exercises (stock is bought, or given by company if it's employee stock options) isn't included in the stock buy number. However all option exercise have to be reported to the SEC on a "form 4" since the Securities Exchange Act Of 1934. And could theoretically bring down the sell/buy ratio.
Wall Street and the Free Market
There's a certain implication that because America is the Land of the Free and Wall Street is located there, that the stock market is a demonstration of the free market at work. Yet at the core of all the trading laws in place to control the market for our protection is this idea that insider trading is against the rules.
A "free market" means that if there is a willing buyer, and a willing seller, a trade can occur. Each side feels that they are ending up better off than they were before.
Information is the most valuable commodity. When any commodity is in short supply, entrepreneurs will search for a way to provide that scarce item in return for a profit. Where information is lacking, entreprenuers will see that the information is spread as widely as possible.
Insider trading laws are difficult to enforce. A stock tip spreads by word of mouth, rumor to rumor, until it reaches a particular fellow who buys the stock. Even a small amount of information is very useful, and it takes very little effort to deliver that information. If I sit outside a factory wharehouse and count the shipments leaving the big bay doors, I now have information that was not made available to the all the public at the same time. If I now know that sales are up 50% this quarter, I have information that could put an executive of that company in jail, if he had told me.
On the other hand, if you allow "insider trading," the information can be freely distributed as soon as it is discovered. Newsletters of stock tips can be distributed to whomever is willing to pay for them. If people want to know, the details will come out.
This benefits the "average" stock investor because now he has a chance to buy the newsletter of hot tips, instead of sneaky insiders being the only ones to have the info.
Bizarre argument
I would like to remove this paragraph:
- Advocates of legalization sometimes also make free speech arguments. Imprisoning someone for telling someone else about a development pertinent to the next day's likely stock moves would seem, prima facie, to be a punishment of prohibited speech, i.e. an act of censorship.
It doesn't make sense. Insider trading as I understand it is the act of making deals based on privileged information, not on disseminating the information itself. I would have just ripped out this text, but do these "advocates of legalization" really make such an argument? If they do, then the text should remain, and I will add a sentence explaining that it doesn't make sense anyway. Jeeves 13:26, 21 Apr 2005 (UTC)
- Actually, the SEC does prohibited disseminating the information in some cases. And, free speech arguments are made. Here is a source: [1] (http://www.walterblock.com/publications/information_privilege.pdf) Among other things, it talks about a case involving "Dirks" where a broker was punished for telling his clients nonpublic information so they could get out of their position and not lose money.RJII 18:17, 21 Apr 2005 (UTC)