>Every security transaction has a willing buyer and a willing seller.
When you step up to a shell game on the street, you are willingly buying from a willing seller. It's illegal because the game is rigged, unregulated, and leads to further crimes.
>Moreover, much “insider” trading is legal, such as hedge funds trading on their own research.
If they do the research with public sources, it's not insider. If they use non-public sources, it's insider.
The biggest loophole is Congress, which has exempted themselves from the prohibition. That's very bad.
It's not just about the potential effects on the stock market.
Allowing insider trading would also incentivize leaders to make business decisions that primarily serve their personal interests, rather than their company's. They would prioritize decisions that create short-term changes in the company’s stock price, just so they can profit from trading on that information.
In our libertarian utopia every employee at every company would receive a complex set of financial derivatives to incentivize them to manipulate the stock in exactly the way we want. Will Bob from Accounts push out recognising some revenue from this Quarter so that we miss projections and he can profit off some short dated Puts? No, because we had our HR team string together a series of quarterly short strangles to incentivize him to stabilize our share price.
As I understand it, fiduciary duty is a key requirement for insider trading to be considered illegal.
Insider trading law requires people with fiduciary duty to report trading, and largely allows any trading after earnings. In particular, with the view that all relevant information on the company was made public recently (if that's not the case, it's the company that would get in trouble). So insider trading is largely legal.
Also, the HK market being above the median by itself doesn't show that it's a good idea. Efficiency was defined as the relative spread in the paper. The efficiency of the HK market might be driven by other factors, like deeper adoption of technology. A better (but still not great) test would be what happened after HK made insider trading illegal.
This pits those in favor of maximizing the size of the pie (most everyone) against those who would rather shrink it and maximize the size of their slice (Harley riders, the he-who-must-not-be-named politician, cannibals, insider trading proponents.)
The stock market was one of the most economically efficient inventions in history. It massively grew the size of the pie. Nothing made it more stable and efficient than the banning of insider trading. Removing the ban would turn it into a cesspool of cheating that would make yesterday's meme stocks look like treasuries by comparison.
But that would be just fine with the would-be cheaters. They view it like the ban on Harleys by your HOA. If they could just ride their Harley around your cul-de-sac all night, they could buy your house for a song when you move out. It would increase the size of their slice, so it makes total sense to them.
IMO, when it comes to market regulation, questions of the type "Should X be legal?" should be answered by yes if and only if it benefits the economy in general.
Insider trading does not, neither do stock buybacks and a few other things I'd like to be made illegal again.
> While most countries have strong protections against insider trading, historical evidence suggests that efficient economies do not need such regulations
> I really loath Cato's hand-wavy libertarian claims pieced together with weak arguments in their writing pieces.
There's very few actual libertarian voices anymore, so I think just for sparking conversation it's good. Whether you are left or right, or even western or eastern, conservative or liberal, in 2024 there is basically agreement that government needs to fix things and government should have more control. Bureaucracy is increasing everywhere. Everyone is doing deficit spending.
There's almost no one mainstream that is actually advocating for less government. Dems in the US might accuse the republicans of wanting less, but I find it hard to find evidence republicans have done any reduction in government since Reagan, and even he did quite little.
I have worked on equities platforms in the US and Europe. I consider both arguments given early in the piece to be convincing defences of insider trading bans.
1. "insider trading argue [..] violates the principle of equal opportunity because actors are trading on information available only to them". This is true - it does undermine the principle of equal opportunity. The argument the author makes later about hedge funds is not relevant to this, because they are building their conclusions from a foundation of public information.
2. "[insider trading] creates inefficiencies by discouraging investment". It does. The equities market only exists because of the combination of the heavy regulation that creates it, and the public that chooses to invest in it. The equities market will only retain public confidence while people have high confidence in the utility value of the system. This is an ongoing project, akin to regularly painting a house to protect the walls. Allowing insider trading would undermine that project, because it would rightfully strengthen the perception that there was one standard for insiders and another for outsiders.
I will present two further arguments.
3. Work related to employment should focus on service to the company. If people are trading on the back of information they access through employment, that creates mixed incentives.
4. Laws around equities trading are structured to service the principle of do-the-right-thing. This includes bans on front-running, rules about not loading up the book to communicate false interest. The ban on insider trading fits naturally into the ethos of the larger set of rules. It would be weird to create an exception for that alone.
The post does give an interesting picture of a world without insider trading.
a. More efficient price-discovery. This is true.
b. Non-government mechanisms where firms prevent insider trading. A firm could build a reputation for being good at this, and distinguish themselves against the market.
The second point is true, but it creates a more complicated market structure, because pricing of equities would need to consider how individual companies enforce the behaviour of their staff. Perhaps this would evolve into an industry standard akin to SOC 2 Type 2. Yuck! It is simpler and more efficient to have the regulator outlaw insider trading.
Most markets emerge organically. Food stalls, shoe shops, commodities, foreign exchange. But this is not true of the equities market.
The equities market as we currently think of it is a product of heavy government regulation, and would not exist without it. There is no such thing as a big equities market without heavy regulation. If you tried to build such a thing, that thing would not win public confidence. If they changed an existing system, liquidity would flow away to other jurisdictions. The importance of public confidence motivated Hong Kong and France [1] to create insider trading bans. The dynamics of insider trading and public confidence are a reason to be dubious about the prospects of some proposals for blockchain-based securities.
That was weak. The private contracts would go away if insider trading was legal, how dense is this author
I would be for more and faster disclosures of trading by insiders, and advertising/voluntary disclosures of a trades based on MNPI as a safe harbor and signal to the market. Promote price discovery.
a lot of capitalism is just gambling, and being able to rig the casino so you keep winning doesn't somehow make you a smarter gambler, it doesn't make gambling less wrong, it doesn't make you more deserving because you figured it out. The entire thing is a wash. The people in control of making laws shouldn't be exploiting those laws. What's the point of laws at all, then?
It is for members of congress apparently.
>Every security transaction has a willing buyer and a willing seller.
When you step up to a shell game on the street, you are willingly buying from a willing seller. It's illegal because the game is rigged, unregulated, and leads to further crimes.
>Moreover, much “insider” trading is legal, such as hedge funds trading on their own research.
If they do the research with public sources, it's not insider. If they use non-public sources, it's insider.
The biggest loophole is Congress, which has exempted themselves from the prohibition. That's very bad.
"Should polluting the rivers be legal?" asks the Industrial Processors Federation
"Should bribing politicians be legal?" asks the League of Responsible Lobbyists
It's not just about the potential effects on the stock market.
Allowing insider trading would also incentivize leaders to make business decisions that primarily serve their personal interests, rather than their company's. They would prioritize decisions that create short-term changes in the company’s stock price, just so they can profit from trading on that information.
In our libertarian utopia every employee at every company would receive a complex set of financial derivatives to incentivize them to manipulate the stock in exactly the way we want. Will Bob from Accounts push out recognising some revenue from this Quarter so that we miss projections and he can profit off some short dated Puts? No, because we had our HR team string together a series of quarterly short strangles to incentivize him to stabilize our share price.
As I understand it, fiduciary duty is a key requirement for insider trading to be considered illegal.
Insider trading law requires people with fiduciary duty to report trading, and largely allows any trading after earnings. In particular, with the view that all relevant information on the company was made public recently (if that's not the case, it's the company that would get in trouble). So insider trading is largely legal.
Also, the HK market being above the median by itself doesn't show that it's a good idea. Efficiency was defined as the relative spread in the paper. The efficiency of the HK market might be driven by other factors, like deeper adoption of technology. A better (but still not great) test would be what happened after HK made insider trading illegal.
This pits those in favor of maximizing the size of the pie (most everyone) against those who would rather shrink it and maximize the size of their slice (Harley riders, the he-who-must-not-be-named politician, cannibals, insider trading proponents.)
The stock market was one of the most economically efficient inventions in history. It massively grew the size of the pie. Nothing made it more stable and efficient than the banning of insider trading. Removing the ban would turn it into a cesspool of cheating that would make yesterday's meme stocks look like treasuries by comparison.
But that would be just fine with the would-be cheaters. They view it like the ban on Harleys by your HOA. If they could just ride their Harley around your cul-de-sac all night, they could buy your house for a song when you move out. It would increase the size of their slice, so it makes total sense to them.
IMO, when it comes to market regulation, questions of the type "Should X be legal?" should be answered by yes if and only if it benefits the economy in general.
Insider trading does not, neither do stock buybacks and a few other things I'd like to be made illegal again.
No.
https://en.wikipedia.org/wiki/Betteridge's_law_of_headlines
> While most countries have strong protections against insider trading, historical evidence suggests that efficient economies do not need such regulations
What historical evidence are they looking at?
https://en.wikipedia.org/wiki/Pecora_Commission https://en.wikipedia.org/wiki/Albert_H._Wiggin
On a tangent, I really loath Cato's hand-wavy libertarian claims pieced together with weak arguments in their writing pieces.
> I really loath Cato's hand-wavy libertarian claims pieced together with weak arguments in their writing pieces.
There's very few actual libertarian voices anymore, so I think just for sparking conversation it's good. Whether you are left or right, or even western or eastern, conservative or liberal, in 2024 there is basically agreement that government needs to fix things and government should have more control. Bureaucracy is increasing everywhere. Everyone is doing deficit spending.
There's almost no one mainstream that is actually advocating for less government. Dems in the US might accuse the republicans of wanting less, but I find it hard to find evidence republicans have done any reduction in government since Reagan, and even he did quite little.
I have worked on equities platforms in the US and Europe. I consider both arguments given early in the piece to be convincing defences of insider trading bans.
1. "insider trading argue [..] violates the principle of equal opportunity because actors are trading on information available only to them". This is true - it does undermine the principle of equal opportunity. The argument the author makes later about hedge funds is not relevant to this, because they are building their conclusions from a foundation of public information.
2. "[insider trading] creates inefficiencies by discouraging investment". It does. The equities market only exists because of the combination of the heavy regulation that creates it, and the public that chooses to invest in it. The equities market will only retain public confidence while people have high confidence in the utility value of the system. This is an ongoing project, akin to regularly painting a house to protect the walls. Allowing insider trading would undermine that project, because it would rightfully strengthen the perception that there was one standard for insiders and another for outsiders.
I will present two further arguments.
3. Work related to employment should focus on service to the company. If people are trading on the back of information they access through employment, that creates mixed incentives.
4. Laws around equities trading are structured to service the principle of do-the-right-thing. This includes bans on front-running, rules about not loading up the book to communicate false interest. The ban on insider trading fits naturally into the ethos of the larger set of rules. It would be weird to create an exception for that alone.
The post does give an interesting picture of a world without insider trading.
a. More efficient price-discovery. This is true.
b. Non-government mechanisms where firms prevent insider trading. A firm could build a reputation for being good at this, and distinguish themselves against the market.
The second point is true, but it creates a more complicated market structure, because pricing of equities would need to consider how individual companies enforce the behaviour of their staff. Perhaps this would evolve into an industry standard akin to SOC 2 Type 2. Yuck! It is simpler and more efficient to have the regulator outlaw insider trading.
Most markets emerge organically. Food stalls, shoe shops, commodities, foreign exchange. But this is not true of the equities market.
The equities market as we currently think of it is a product of heavy government regulation, and would not exist without it. There is no such thing as a big equities market without heavy regulation. If you tried to build such a thing, that thing would not win public confidence. If they changed an existing system, liquidity would flow away to other jurisdictions. The importance of public confidence motivated Hong Kong and France [1] to create insider trading bans. The dynamics of insider trading and public confidence are a reason to be dubious about the prospects of some proposals for blockchain-based securities.
:1 see p46/47 https://repository.law.miami.edu/cgi/viewcontent.cgi?article...
No, twice.
Not for any of the reasons listed in this article
That was weak. The private contracts would go away if insider trading was legal, how dense is this author
I would be for more and faster disclosures of trading by insiders, and advertising/voluntary disclosures of a trades based on MNPI as a safe harbor and signal to the market. Promote price discovery.
Indeed, I think it’s obvious the reason the companies train about insider trading and have rules and blackout periods is becuase it’s illegal!
N. Pelosi entered the chat.
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a lot of capitalism is just gambling, and being able to rig the casino so you keep winning doesn't somehow make you a smarter gambler, it doesn't make gambling less wrong, it doesn't make you more deserving because you figured it out. The entire thing is a wash. The people in control of making laws shouldn't be exploiting those laws. What's the point of laws at all, then?