Insider trading - why is it illegal?

[Wootah]

I don't think insider trading should be illegal.

I thnk the system is rigged and insider trading laws in effect make people think the system is not rigged. I would rather remove the law and allow insider trading so that the market can effectively factor in insider trading.

Can someone argue for insider trading?

[Purple Knight]

I guess the reason it's disallowed is to preserve the illusion that you're not playing against people who just have more and better information than you do, causing more people to invest, even if they lose it, and the argument would be, well, that helps the economy.

But frankly I've always seen things your way and if the market is a sham, let's have one that isn't. Let's let things be worth what they're worth, when everyone at least knows they're playing poker with people who can see their cards, while they cannot see anyone else's cards. They might not play. To me, good. I'm not onboard with deceiving everyone so everyone can receive some nebulous benefit. In reality it's probably so an elite few can get the benefit.

[benchwarmer]

[Replying to Purple Knight in post #2]

Insider trading is illegal because it gives too much power (all the power?) to those on the inside.

If a CEO sees that all of his new product launches are not receiving enough orders to be profitable, he knows that once that knowledge becomes public, the stock will likely drop. If insider trading were legal, he could short a huge block of stock just before the information is made public, watch the stock price drop, then immediately cash in. He had an unfair advantage.

It's all about restricting those with unfair knowledge from taking advantage of everyone else. If we make insider trading legal, you would definitely not want to be in the stock market. You will lose everything to those with knowledge you don't have.

Maybe I'm missing the point here or you don't understand what insider trading is? I can't see any good from making it legal unless you happen to be one of the few people that will have that insider knowledge. It's not like important inside knowledge is available to everyone. Are you trying to advocate that ALL inside knowledge be made public instantly? That would not work or be feasible. Someone will always have the knowledge first before publishing it. That would be the prime time to take advantage if it were legal.

[Wootah]

[Replying to benchwarmer in post #3]

OK so he does that. Damage occurs. Market corrects. No one will invest in companies he is in.

[benchwarmer]

[Replying to benchwarmer in post #3]

OK so he does that. Damage occurs. Market corrects. No one will invest in companies he is in.

But the market won't correct, it will evaporate. Who will trade in a market where a select few will always pull all the other people's money out of it because they know exactly how to time things?

If insider trading were legal MOST people who have insider knowledge and a wish to make money in the market will use that knowledge to take advantage of everyone else who doesn't have that knowledge. Would you put money in any stock if you knew insiders could tank it at any time?

The stock market isn't a bank. The value of a stock is driven by perceived value and the willingness of people to buy into it. If I don't have all the knowledge about what might happen to the value of the company (and thus the stock) I'm at a huge disadvantage to those that do based on inside knowledge.

I really don't understand why anyone thinks insider trading would be good (other than for the insider traders I guess).

[Wootah]

[Replying to benchwarmer in post #5]

Well I don't see how it is illegal to know something and act on it.

[benchwarmer]

[Replying to benchwarmer in post #5]

Well I don't see how it is illegal to know something and act on it.

Do you not see that if insider trading was legal that there would be no viable market? You didn't answer my questions so I assume you probably wouldn't want to put your money into a system where insiders can basically take your investment by selling all their stock at an opportune time and tanking the value of the stocks you own.

Do you think selling known defective products to someone should be illegal? It's essentially the same thing. The insider knows what they are selling you won't be worth the money you are giving them for it. You will try to use the product, it will fail, and you are left with something you can't sell because now everyone knows it's defective.

Put another way:

1. I want to sell you a gizmo for $100. You think these gizmos will hold their value so you buy 10 of them for $1000.
2. I already know that I'm about to ship millions of these gizmos next month and they will go for $5 each. However, I want to milk the current rarity of these gizmos and get people to buy in now. The upcoming shipment is NOT public knowledge.
3. 1 month later, I ship all the gizmos and the price drops to $5. I have your $1000 and at best you can sell what you have for $50. I knew this was going to happen and you didn't.

[Purple Knight]

Do you not see that if insider trading was legal that there would be no viable market?

Then perhaps there should be no viable market. There are always perennial losers. They put their money in because they think they can win.

It's like an MMO game where everyone says, "Things should be difficult. The bottom 10% shouldn't be able to complete the content. Skill should matter." So the bottom 10% can't do anything and quit. Well, now there's another bottom 10%. People are still upset that the content is now "for everyone" and repeat their cry that skill should matter. Difficulty increases again. That's going to happen until there's just 1 person left because if losers know they're losers before they play, they won't play.

The same way a game that wants winners and losers is unviable if transparent, because the losers won't play, the market is unviable if transparent, because the losers won't play. This is a much better case against systems that want winners and losers than it is against transparency. The MMO can be fixed by just making content easy enough for everyone to complete, or, at some point, ignoring the skilled elite who want content made more difficult. The market cannot because it's inherently competitive and you're not fighting computer generated monsters; you're fighting other people.

1. I want to sell you a gizmo for $100. You think these gizmos will hold their value so you buy 10 of them for $1000.
2. I already know that I'm about to ship millions of these gizmos next month and they will go for $5 each. However, I want to milk the current rarity of these gizmos and get people to buy in now. The upcoming shipment is NOT public knowledge.
3. 1 month later, I ship all the gizmos and the price drops to $5. I have your $1000 and at best you can sell what you have for $50. I knew this was going to happen and you didn't.

I don't think this is covered by the laws against insider trading. This is just a capitalist making money, and it's also every scummy mattress store around where I live. It's my understanding that you would have had to have bought all those gizmos on the stock market yourself, for that to apply. If you're the one who made them, you're just pricing your own merchandise in any way you want, for any reason you want, which you are, as I understand it, allowed to do. Stores do this all the time, so how can it be illegal? Is it insider trading to not do something? If I know a store is going to reduce its price on this couch I want to half-off, is it insider trading to decide not to buy it and wait instead?

If this is so horrible a thing to scam people like this, why isn't it illegal off the stock market?

[benchwarmer]

Do you not see that if insider trading was legal that there would be no viable market?

Then perhaps there should be no viable market. There are always perennial losers. They put their money in because they think they can win.

Perhaps you are right. The money has to come from somewhere. Someone is always funding the 'winners'. The point of making insider trading illegal is that they want a market that won't just implode.

It's like an MMO game where everyone says, "Things should be difficult. The bottom 10% shouldn't be able to complete the content. Skill should matter." So the bottom 10% can't do anything and quit. Well, now there's another bottom 10%. People are still upset that the content is now "for everyone" and repeat their cry that skill should matter. Difficulty increases again. That's going to happen until there's just 1 person left because if losers know they're losers before they play, they won't play.

Sort of. To make the analogy more apt, only the designers of the game would have the knowledge to complete the content. Everyone else who bought the game would be left at a disadvantage they can't overcome other than sheer luck/guessing.

1. I want to sell you a gizmo for $100. You think these gizmos will hold their value so you buy 10 of them for $1000.
2. I already know that I'm about to ship millions of these gizmos next month and they will go for $5 each. However, I want to milk the current rarity of these gizmos and get people to buy in now. The upcoming shipment is NOT public knowledge.
3. 1 month later, I ship all the gizmos and the price drops to $5. I have your $1000 and at best you can sell what you have for $50. I knew this was going to happen and you didn't.

I don't think this is covered by the laws against insider trading.

Of course not, it was an analogy (perhaps not made clear, sorry).

This is just a capitalist making money, and it's also every scummy mattress store around where I live. It's my understanding that you would have had to have bought all those gizmos on the stock market yourself, for that to apply. If you're the one who made them, you're just pricing your own merchandise in any way you want, for any reason you want, which you are, as I understand it, allowed to do. Stores do this all the time, so how can it be illegal? Is it insider trading to not do something? If I know a store is going to reduce its price on this couch I want to half-off, is it insider trading to decide not to buy it and wait instead?

Sure, and clearly my analogy is not a perfect one. When you buy stock in a company, you are buying a piece of that company. You own a 'share' of it. After you buy a mattress from the scummy mattress store, you don't own a piece of the mattress store, just your new mattress. You have your item you paid for. There's no expectation of buying a mattress as a financial investment.

I was simply trying to show that offering people part of your company and then changing the value of your company at your control is leaving you all the power. It would be kind of like banks deciding that your $100 dollars in your savings account is now only $10. Ya, probably not the best analogy either

If this is so horrible a thing to scam people like this, why isn't it illegal off the stock market?

Likely because companies that participate in the stock market have to adhere to certain rules (no insider trading). Mattress stores don't have to adhere to "don't try and fool your customers".

[Purple Knight]

Perhaps you are right. The money has to come from somewhere. Someone is always funding the 'winners'. The point of making insider trading illegal is that they want a market that won't just implode.

I think ultimately it's the government funding it. They do prop up the stock market sometimes. The question is just how much they do it, and the ultimate question is whether $10 spent propping up the stock market makes Joe Average better off than if the stock market didn't exist and they just gave him his share of the $10. I can't say whether it does or not.

Basic intuition is that if the rich are better off - having more real wealth - without doing more, then that came from somewhere. If he has an extra horse someone had to breed it for him. An extra mansion, someone had to build. People are generating more wealth, and the extra is ending up in the same person's hand. Unless his efforts made them more efficient (which I admit can be the case) he's a parasite. I do wonder if moving money around through the stock market can make anyone actually building anything more efficient. Inventing something, sure. Moving money, I don't see it.

Sort of. To make the analogy more apt, only the designers of the game would have the knowledge to complete the content. Everyone else who bought the game would be left at a disadvantage they can't overcome other than sheer luck/guessing.

The luck/guessing is the basic premise, isn't it? Either way, if you know you're a loser, you won't put money in. That's why I worry that the laws against insider trading just serve to entice in more who will ultimately be losers. Now, what a Libertarian might say is that well, Loser Larry did good still, that ultimately helped him. He put money in, it went to a fish company that went under. But in the meantime the fishermen were paid and fish were generated, feeding people.

Sure, and clearly my analogy is not a perfect one. When you buy stock in a company, you are buying a piece of that company. You own a 'share' of it. After you buy a mattress from the scummy mattress store, you don't own a piece of the mattress store, just your new mattress. You have your item you paid for. There's no expectation of buying a mattress as a financial investment.

I was simply trying to show that offering people part of your company and then changing the value of your company at your control is leaving you all the power. It would be kind of like banks deciding that your $100 dollars in your savings account is now only $10. Ya, probably not the best analogy either

But that does happen through inflation. The banks don't decide and the companies do, by pricing their merchandise, how much your money is worth. Every time they decide to raise prices simply because they want to make more money, they start a chain reaction that transfers your wealth straight out of the bank to them, whether you buy their crud or not.

Likely because companies that participate in the stock market have to adhere to certain rules (no insider trading). Mattress stores don't have to adhere to "don't try and fool your customers".

Well, would it make the market better (as in, more people have more actual wealth gains) if scummy mattress stores did have the restriction of not trying to fool the customer? It may well be that such a rule would, if well-enforced, allow less energy to be spent protecting oneself from scams, and more energy to be spent generating real wealth. Imagine if Gullible Gandy works 100 hours creating sprockets for the money to buy a mattress, and he expects that without 10 hours of extreme care and research he'll just be scammed. Stop him from being scammed and he can create 10% more sprockets.

But "no scamming" doesn't run parallel to "no insider trading" - in fact it seems opposite. If anything, no scamming would be closer to everyone having the best information and being permitted to act on it, not trying to stop those with more information from acting how they naturally would because they have it.

And there would definitely be no market if everyone had perfect information. The only trades that happened would be those that intentionally traded less now for more later, or vice-versa.