Why is insider trading bad
- Thread starter BDGBDG
- Start date
well lets see.....if they didnt have the news the hedge fund would a) not unload their whole position B) probably not be hitting bids either...hence letting some sellers enjoy higher prices at the moment...Im not saying anyone has to take the other side...but their gain from inside knowledge is coming from some where is it not?
Arguments for legalizing insider trading
Some economists and legal scholars (e.g. Milton Friedman, Thomas Sowell, Daniel Fischel, Frank H. Easterbrook) argue that laws making insider trading illegal should be revoked. They claim that insider trading based on material nonpublic information benefits investors, in general, by more quickly introducing new information into the market.
Economist Milton Friedman, laureate of the Nobel Memorial Prize in Economics, said: "You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that." Friedman does not believe that the trader should be required to make his trade known to the public, because the buying or selling pressure itself is information for the market.
Other critics argue that insider trading is a victimless act: A willing buyer and a willing seller agree to trade property which the seller rightfully owns, with no prior contract (according to this view) having been made between the parties to refrain from trading if there is asymmetric information.
Legalization advocates also question why activity that is similar to insider trading is legal in other markets, such as real estate, but not in the stock market. For example, if a geologist knows there is a high likelihood of the discovery of petroleum under Farmer Smith's land, he may be entitled to make Smith an offer for the land, and buy it, without first telling Farmer Smith of the geological data. Of course there are also circumstances when the geologist could not legally buy the land without disclosing the information, e.g. when he had been hired by Farmer Smith to assess the geology of the farm.
Advocates of legalization make free speech arguments. Punishment for communicating about a development pertinent to the next day's stock price might seem to be an act of censorship [2]. Nevertheless, if the information being conveyed is proprietary information and the corporate insider has contracted to not expose it, he has no more right to communicate it than he would to tell others about the company's confidential new product designs, formulas, or bank account passwords.
There are very limited laws against "insider trading" in the commodities markets, if, for no other reason, than that the concept of an "insider" is not immediately analogous to commodities themselves (e.g., corn, wheat, steel, etc.). However, analogous activities such as front running are illegal under U.S. commodity and futures trading laws. For example, a commodity broker can be charged with fraud if he or she receives a large purchase order from a client (one likely to affect the price of that commodity) and then purchases that commodity before executing the client's order in order to benefit from the anticipated price increase.
Some economists and legal scholars (e.g. Milton Friedman, Thomas Sowell, Daniel Fischel, Frank H. Easterbrook) argue that laws making insider trading illegal should be revoked. They claim that insider trading based on material nonpublic information benefits investors, in general, by more quickly introducing new information into the market.
Economist Milton Friedman, laureate of the Nobel Memorial Prize in Economics, said: "You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that." Friedman does not believe that the trader should be required to make his trade known to the public, because the buying or selling pressure itself is information for the market.
Other critics argue that insider trading is a victimless act: A willing buyer and a willing seller agree to trade property which the seller rightfully owns, with no prior contract (according to this view) having been made between the parties to refrain from trading if there is asymmetric information.
Legalization advocates also question why activity that is similar to insider trading is legal in other markets, such as real estate, but not in the stock market. For example, if a geologist knows there is a high likelihood of the discovery of petroleum under Farmer Smith's land, he may be entitled to make Smith an offer for the land, and buy it, without first telling Farmer Smith of the geological data. Of course there are also circumstances when the geologist could not legally buy the land without disclosing the information, e.g. when he had been hired by Farmer Smith to assess the geology of the farm.
Advocates of legalization make free speech arguments. Punishment for communicating about a development pertinent to the next day's stock price might seem to be an act of censorship [2]. Nevertheless, if the information being conveyed is proprietary information and the corporate insider has contracted to not expose it, he has no more right to communicate it than he would to tell others about the company's confidential new product designs, formulas, or bank account passwords.
There are very limited laws against "insider trading" in the commodities markets, if, for no other reason, than that the concept of an "insider" is not immediately analogous to commodities themselves (e.g., corn, wheat, steel, etc.). However, analogous activities such as front running are illegal under U.S. commodity and futures trading laws. For example, a commodity broker can be charged with fraud if he or she receives a large purchase order from a client (one likely to affect the price of that commodity) and then purchases that commodity before executing the client's order in order to benefit from the anticipated price increase.
again you are saying it as if i am taking the other side or that i made a bad trade...and thats not the picture i am painting...if i happen to be entering a sell on IMCL just because i need the money to buy a car and the trade is good i am in the money ....why should i get a lower price on my sell because these guys just got inside info...it isn't that i made a bad trade..its just that i should get a better print...hence their gain from inside knowledge may cost me a better print...and while yo umay say hey you made money...i just got screwed from making more...
"Legalization advocates also question why activity that is similar to insider trading is legal in other markets, such as real estate, but not in the stock market."
it is not legal. if you know that the foundation is bad on your house and do not disclose it you are liable for damages.
it is not legal. if you know that the foundation is bad on your house and do not disclose it you are liable for damages.
1. You ASSUME that insider trading always effects the price. It is not the case. A CEO can get ride of quite a few shares without moving the market.
2. For people being in the same direction as the insider trader the insider trading actually helps. So we can make an argument that it could help just as many people as it hurts...
Also, by monitoring big or important shareholders, the market could be made more effective. Now if a CEO is selling suddenly that doesn't necessery mean he knows some bad news maybe he just needs the money. They already have to report such activity...
Sometimes insider traders also screw themselves (thus the info not always reliable or maybe just for the short term). If Martha had kept those shares 6 months longer, she would have made money on her position...
OK, here is a scenario, what is the difference?:
1. CEO sells his stocks at $50 due to upcoming bad news. After earnings report stocks drop $10, you sell with a 10$ loss per share.
2. CEO doesn't sell his stock, after earnings stocks still plumet, you still have a $10 loss.
1) a big position being dumped into the market does affect price..not to mention the pressure from perhaps reversing the position to a short..it affects it enough for me not to get the print i would have otherwise gotten. not to mention the others who also happen to be selling at that moment. my point is that their gain is coming from somehwere..the money isnt just coming out of thin air..it may not be big to an individual like myself but as a whole it is huge. Imagine done repeatadly
2) how does an insider dumping his stock hitting bids help me when i am selling at the same time?
3) yes sometimes inside info is not correct and they get hurt...so does a bank robber eventually get shot when stealing a bank...what does that have to do with the crime?? it doesnt
make it right just cuz they get hurt doing it....
i understand your point though...dont get me wrong..i may be missing something thats all