Jan

27

I'd like to share this thought provoking article, "It's Time to Make Insider Trading Fully Legal":

The newspapers in recent months have been full of bombshell stories about insider trading on Wall Street. According to an account in the Wall Street Journal, "the investigations, if they bear fruit, have the potential to expose a culture of pervasive insider trading in US financial markets, including new ways nonpublic information is passed to traders through experts tied to specific industries or companies." The basic argument made against what its detractors call "insider trading" is that the ability to act on nonpublic information creates an unlevel playing field that decreases faith in the stock markets themselves. If access to information is made equal, small investors will allegedly feel more comfortable placing their savings in the markets.

One problem with the above theorizing is that what most deem "insider trading" has never been defined by lawmakers or the courts. Worse, not considered enough is how both the economy and investors are harmed when necessary information is obscured, thereby perpetuating unrealistic share valuations.

Ultimately, it should be said that to ban insider trading is to block use of the very information necessary for markets to function properly. The better solution is to cease prosecution of what is already vague, and in the process reward market sleuths whose efforts will ensure properly priced shares, and in the case of poorly run firms, no further waste of capital.

Read the full article here. 

Dylan Distasio replies: 

I would assume the author of this article is attempting to ignite a controversy, but I will go a head and take the bait… He writes:

One problem with the above theorizing is that what most deem "insider trading" has never been defined by lawmakers or the courts. Worse, not considered enough is how both the economy and investors are harmed when necessary information is obscured, thereby perpetuating unrealistic share valuations.

To this I would reply: "When I see a bird that walks like a duck and swims like a duck and quacks like a duck, I call that bird a duck." or perhaps in the vein of Stewart "I know it when I see it."

Here's an example of what I'm referring to, although in this case, it's a goose not a duck:

Insider trading is an economic plus. Arguably the greatest reason that governments should encourage insider trading has to do with economic growth. To put it very simply, we live in a world of limited capital, and insider trading ensures that share prices will reach fully informed levels as quickly as possible.

To encourage the opposite, as in making insider trading a crime, is to delay the happy process whereby companies achieve a fair price. To the extent that market altering information is kept from reaching the marketplace, companies doing what investors want will necessarily not receive as much capital as they otherwise might. Poorly run companies will receive more capital than they can efficiently use.

This is a laughable justification…Insider trading doesn't help share prices to "reach fully informed levels as quickly as possible." It helps the few with privileged information line their pockets in an unethical manner. The fact that it is insider information by definition dictates that it is not being disclosed publicly and thus does little to allow share prices to quickly reach a new equilibrium. A public news release that a company didn't get expected FDA approval for a new drug, as in the recent case of MNKD helps the stock reach a new equilibrium rapidly.

Hypothetical insiders quietly dumping their shares and trying to cover their tracks as best as possible ahead of a news release serves no one other than themselves (This comment is not in reference to MNKD).

I thought I had seen everything until I read this article, I apologize in advance for feeding the troll.

Rudolf Hauser writes:

An officer or director of a company has a fiduciary duty to represent the interests of the company's shareholders. As such they should not be allowed to use material information about their companies that has not yet been reported to the public and shareholders for their personal advantage in changing their position ahead of shareholders in response to either good or adverse developments. Such insider trading should be subject to breach of fiduciary duty legal actions to reclaim an any advantage plus punitive damages. Given that a company with many small shareholders might not find it advantageous on an individual basis to sue the SEC should have the power to sue on their behalf. Those involved in arranging deals, etc. likewise have a fiduciary duty to the companies involved as their clients not to act on such information. This is what the law would look like if I were writing it.

When it comes to others who are not in a position of fiduciary duty, I too would not make such use of non-public information illegal. If the news is positive it provides the seller with a better price than he or she would otherwise have–which helps rather than hurts them. Likewise, with regard to such selling on non-public information, the investor intent on buying receives a lower price–which again is to his or her benefit, not detriment. The only ones who might be hurt are those who might decide to act based on the new price before the full impacts of the developments in question are reflected in the stock price. I would guess that the former are more likely than the latter instances. The wider the scope of what is called insider information, the more nebulous the concept and the more it discourages analysis. For example, if one has many industry contacts who can provide a feel for industry trends without any providing what would be considered information in itself, at what point does the interpretation of the law become so broad that having such a information network is itself considered inside information? The regulators have a tendency to try to keep expanding the reach of the rules they impose.

But of course, I am not the one writing the laws. So whether good or bad, the law is what it is and should be followed until such time as it is changed by proper legal process.


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