If one can backup and use a fuzzy enough lens, one can just ask "how should society calculate the total benefits here" but the problem is this begs the question of whether it's proper for the state to just ask these questions.
My impression is that none of the insider trading proponents are also proponents of the view that it's not theft to take money that falls off the back of an armored car because "it's hard to who it belongs to" and "we might well benefit from this money more than whoever it really belongs to" but their arguments seem the same. Further, the average people finding money on the street probably really do need it more than your average insider trader.
> If one can backup and use a fuzzy enough lens, one can just ask "how should society calculate the total benefits here" but the problem is this begs the question of whether it's proper for the state to just ask these questions.
But in the case of insider trading, there is no such person. Lambdapie identifies that there is a cost (yes!), but that cost only exists at a fuzzier level than "the person stolen from". Trying to examine at a finer level doesn't make sense.
This is true of all professional trading.
> borrowing money to short stocks in a company likely to go bankrupt, while telling people to buy
This would be fraud, which is illegal independently of any insider trading rules
And how does the incentive to lie to other traders apply only to insider trading? It seems like that would always apply to all trading.
"Wrong" doesn't automatically mean "criminal."
Should deal with that
It's a dick move, but seems perfectly legal.
The gp does a good job of describing how insider trading actually takes money from particular people. Are you saying that a certain number of people should have their money taken in order that prices are closer to predicting otherwise unknown results? Something like "by eminent domain, we are taking your investment profits for the great good of accuracy in stock prices".
Moreover, the other people who benefit from price jumps from invisible sources are those who don't know anything but who are willing to gamble that these price jumps represent a real increase in value. The existence of such gambling would seem like it increases the overall volatility of the market and given that such gamblers would tend to magnify random jumps in the market as well, it seems like society broadly would not experience any benefit.
Let's say I believe that the company I work with is horribly mismanaged. I short it. Then, all of a sudden, an announcement comes ("corp X is going to buy our company") that raises the price and makes me lose my pants. I have two choices now:
a) lose my pants, or
b) use the due-diligence period to try to kill the deal from the inside.
Are you willing to hold stock of a company in which (b) is likely to happen? I don't.
Furthermore, even though a 5% discrepancy is already huge, in many cases it is much larger than that: valeant recently dropped 70% in a few weeks, and insiders knew all about the irregularities1; If allowed to short, a new employee, upon discovering those irregularities, has a great incentives to quit, short, and go to the newspaper. While this would deliver justice much more swiftly to the company, it would do so to the benefit of that individual at the expense of everyone else. We disallow vigilante justice in general for good reasons and this is no different.
If an insider knows a stock will yield him 10% profit and has a month of time to buy stocks, even if the daily volume is 500k shares. They can gradually buy shares at 20k/day, and once that news becomes public and the liquidy goes up they can sell off all of their shares in one shot pretty much. And people just just got news of the information would think that their stock has a 10% upside, but since someone already beat them to the 10%, they aren't going to get anything.
Let's say the price of a share with the inside info is 110. It is now 100. The inside trader does cause some volume that wouldn't have happened otherwise, and moves the price to 105 -- to the detriment of someone who would not have traded otherwise. But then every subsequent trade is at a price closer to the true one, a clear benefit.
It is true that greater information asymmetries will decrease liquidity/widen spreads, but is this a sufficient justification for banning inside trading? Also, information asymmetry is a matter of degree, not a binary thing. A skilled fund manager may have assembled public information (the "mosaic" view) that when put together is tantamount to insider info. You could use the exact same argument to ban him from trading.