If you exploit information assymetry to make a profit, then your profit is coming at the expense of whoever had less information than you and made the transaction nonetheless. The argument goes, if you had perfect information symmetry, then the transaction would not have occurred, as the person who was willing to buy or sell the stock (for your profit, with information assymetry) would rather keep the profit for themselves.
If insider trading occurs at a large enough scale, then market players begin to assume that the only plays available to them are offered by people seeking to exploit information assymetry, therefore all plays are losing plays. The result is that nobody participates in the market, and the market as a whole becomes worthless. Stop trying to think of insider trading as a crime that victimizes whoever bought or sold the shares from the person with more information, and try to see it as a crime that undermines the common infrastructure that the economy relies upon.
Additional relevant context: whilst most trades can be considered to have winners and losers, in the case of insider trading the executives responsible have created losers from the [former] shareholders they're being paid to work for.
Aside from undermining trust in their communication if they're intentionally concealing information to profit from, the other problem is that it's easier for executives to create insider trading opportunities by making unexpectedly bad decisions than unexpectedly positive announcements...
So either one or both are true: such a scenario is better handled by corporate boards, and/or the SEC needs more teeth to prevent the consolidation of ownership / control of public companies.
One could argue the trust has been gone for a while & yet the market is still going.
[1] https://www.theatlantic.com/magazine/archive/2019/05/stock-v...
[2] https://arstechnica.com/information-technology/2016/11/priva...
[3] https://www.chicagobusiness.com/article/20140717/NEWS01/1407...
The market will stay irrational longer than you stay solvent.
Don't fall in the trap of watching after-the-fact movies about previous crisis, and conclude that "some guys knew it all along but the system tried to hide it". That is not the reality.
The reality is that systems at play are complex, every single day thousands of analysts predict an upcoming crisis, while other thousands predict the opposite.
When you don't understand a price move, it's actually quite difficult to know whether the others are in the wrong and you know better, or if the others just know more and you're in the wrong.
Watching movies about some guys that were right does not mean it's easy to know..
Insider trading is not about having better information than others. People spending effort to figure out better data sources and better ways to value stock is one of the reasons why we even have public financial markets in the first place.
No, the crime of insider trading is about breach of trust: it's only a crime if you obtained the information in some sort of confidence relationship with the company. So, trading based on your intelligence on how much inventory a company moves, obtained through analysis of non-public satellite photos is completely legal, however, doing the same when you have access to the same data as a data center tech is not.
That is already the case, top executives trading is publically reported. This is why insider trading often catches relatives of the person in the know. Like the CEO would ask his cousin to make the trades for him.
Before someone is quick to say "how can you not know?!," there are some pretty ambiguous cases around trading on material, non-public information.
- Counting cars in parking lots as a proxy for sales.
- Your employer sees a drop in sales and is able to directly attribute it to a competitor. Can you buy shares in the competitor?
- You're at a bar in NYC and a drunk i-banker is trying to impress a girl and runs his mouth and talks about a pending acquisition.
It is ambiguous.
The only thing I can say with absolute certainty about insider trading is that anyone who can confidently say XYZ is or isn’t insider trading doesn’t know what they’re talking about.
I agree that the second one seems ambiguous and could certainly result in a lawsuit in the shareholders are unhappy.
I don't think the third one is insider trading, the banker had a duty to keep this information confidential, not you and you did not colluded. This looks a bit like the loan to Kodak that got leaked in the press because they had forgot to embargoed it. While it certainly not good looking for employees of the company to trade on this information, what could possibly reproached to outsiders once this news is all over the Internet? Even after the initial tweet had been removed, the news was out their.
What do you think the best predictor is at the moment?
Do you think it is even hypothetically possible that these people aren't comparing notes over golf?
And why is it objectionable? There are enormous information imbalances out there in the market - why be upset about this one? CEOs aren't the biggest fish in the pond.
It's objectionable because it introduces yet another mechanism for dramatically increasing inequality and economic stratification while also making capital markets more corrupt and less efficient, which undermines core aspects of our economic system.
Someone explained to me once how ambiguous it can be. Let's say we have CEO and his Friend talking together in speech, in real life:
Friend: "Hey CEO! How are things going at company :)"
CEO: "Oh, things are going well."
Friend: "Oh yeah? Is it looking good?"
CEO: "Yes! ;) Looking really good" winks
Friend buys stocks, Press Release comes out, and Friend holds onto the stock for some quarters.
Here you can see that CEO gave a wink and said things are going really good. He could have not winked, he could have said things are going fine. He can also not communicate this over-optimistically with other people.
That would not count as insider trading.
For insider trading regulation to kick in, you need to prove the information given carried substantial certainty about the outcome of the trade.
A wink is definitely not substantial certainty. In your situation, the CEO would have to clearly communicate information that led to a positive trade.
Like, which ones?
That is because you appear to have a false understanding of what insider trading is.
> Information travels with some speed and there will always be people with access to better information making better decisions.
That is not a problem at all, as long as the information on question is not sourced from deliberately undisclosed sources within the company itself or within their business partners.
Encouraging investing time and money into interpretation of publicly available data as best as possible to gather information about a company's future prospects is a good thing, because it helps one of the main purposes of public stock markets, which is slapping an as-accurate-as-possible price tag on a company, so investment capital is put to work as efficient as possible. And since it is solely based on public data, this obviously does no undeserved harm to the company's business prospects.
Conversely, encouraging using information that is still kept secret to do this thwarts the future prospects of the company in question, because that information is usually kept secret for business purposes, and if it wasn't secret, deals would not take place. Hence by encouraging using that secret information to take part in price discovery it is effectively encouraged to break confidentiality of that secret information, which is contrary to the interests of the company wanting to make business in the first place.
> We have much better technology these days.
Technology does not have anything to do with this fundamental discussion
> Rather than making trading some sort of crime we should just have a "relevant persons" standard where CEOs and anyone who has close contact with them have to register what they are about to do a few days before they make any trades of shares in the company.
Your argument is self-defeating. Because in order to make officials adhere to the "inform public about intended trades X days before they take place" rule, you MUST make these trades illegal if they happen without this pre-announcement.
Such rules are indeed in place right now, precisely to combat insider trading. This is why people with inside knowledge often try to pass on that knowledge to friends or relatives instead of trading for themselves, which is still illegal insider trading, but much harder to prove.
> It is fundamentally a bit silly have a situation where it is illegal for someone to make best decision given their knowledge.
No, it is not, in case of insider trading. It is fundamentally a bit silly to expect people to participate in a market that does nothing against insider trading, because if you have to assume that regardless of how good your research based on public data is, your counterparty on the market is likely someone with direct access to confidential insider information and will thus make the better trade, any possible trade must be assumed to be a losing trade, hence participation in that market would be a bit silly in the first place, which eventually kills the entire public market because it just leaves those with insider information actually trading.
If you want public markets, you need to limit trades to be only based on public data, otherwise the public will not have any confidence in the fairness of the market and will decide to stay out of it.
> We can safely guess that the professional traders are leveraging every possible edge, fair or not, SEC regulation or not if they think they can get away with it.
Again, you are misunderstanding what is insider trading. Professional traders usually aren't, because trying to leverage any available public data to gain an edge (like the often mentioned satellite imagery that can be bought on the open market by anyone in order to count cars in parking lots of stores or whatever) is not illegal and totally fine within the purpose of the public market as described above. Insider trading originates from people in the company either directly using secret information to trade for themselves or giving trading tips based on that information to outsiders. These could of course be professional traders by accident, but often they're just retail traders, and in the end the nature of those traders is irrelevant for the discussion anyway, because it is about the nature of the trades and how they were informed, not who the traders are.
We have much better technology these days. Rather than making trading some sort of crime we should just have a "relevant persons" standard where CEOs and anyone who has close contact with them have to register what they are about to do a few days before they make any trades of shares in the company.
It is fundamentally a bit silly have a situation where it is illegal for someone to make best decision given their knowledge. We can safely guess that the professional traders are leveraging every possible edge, fair or not, SEC regulation or not if they think they can get away with it.