
Making Insider Trading Legal - akg_67
http://www.newyorker.com/business/currency/making-insider-trading-legal
======
mstade
> Many people on Wall Street felt that Bharara’s crusade against insider
> trading was recklessly broad: An analyst like Horvath might knowingly obtain
> an illegal tip, but if he feeds his information up the chain to a Steinberg
> or a Cohen, and they take his word that he is not passing along stolen
> goods, should they really go to prison for that misplaced faith? Is it fair
> to convict someone of engaging in insider trading if he didn’t know he was
> doing so at the time?

This quote is interesting. I know that in some countries (including my own,)
dealing in stolen goods is in fact illegal, regardless of whether or not you
knew the goods were stolen in the first place. The onus lies on the buyer of
the goods to remove doubts of where the goods came from, which often amounts
to simply asking the reseller for a receipt. If you're given one which is
bogus, you can claim ignorance and whoever you bought it from would be guilty
of fraud as well as dealing in stolen goods.

Now, I don't know what the law says about dealing in stolen physical goods in
the US, but if it's anything like the above then why should illegally obtained
information be any different? Shouldn't it be reasonable then to ask whoever
is dealing in this information to ask for a receipt, as it were?

~~~
Tomte
Which country is that? Does "illegal" mean criminal liability or just that the
sale is void?

~~~
mstade
Sweden, and in the case of not knowing you were dealing with stolen goods but
still found guilty it seems the worst case scenario is six months in prison.
[1]

[1]: [https://lagen.nu/1962:700#K9P7S1](https://lagen.nu/1962:700#K9P7S1)
(Text in Swedish.)

This wasn't always the case, but I can't quite remember when the law changed.
It used to be that you could claim you bought the goods "in good faith" in
which case you'd be free of liability unless there were other hard evidence to
connect you with the crime – even if you bought that high-end watch off of
some dude selling watches on the street out of a cardboard box.

These days however, it's much easier to convict someone (whether selling or
buying) because of a clause that includes anyone who didn't _know_ but had
_reason to believe_ the goods were stolen. It's easier for the prosecution to
prove the latter, and probably gets rid of most "it fell off the back of
truck" arguments. That high-end watch from that shady dude on the street would
probably get you a fine these days. (Putting people in prison is costly, after
all.)

~~~
erikpe
No. If you bought a high end watch from a shady dude well below market price
and without any papers, you could be found guilty of a crime (posession of
stolen goods) before the law changed as well as after the law changed. Nothing
has changed there.

However, if you bought a used watch at a reasonable price with some plausible
documentation, this is where things has changed somewhat.

Before, if you had bought the watch in "good faith", i.e. there was no obvious
reason for you to suspect it was stolen when you bought it, you were entitled
to keep the watch even if it was later found out it was indeed stolen. Even if
they later found the previous owner, he wasn't allowed to have it back. He had
to go after the thief to get compensation (even if the thief is unknown).

That last thing is what changed. If they find out the watch is indeed stolen,
you have to give it back to the previous owner, even if you bought it in "good
faith". But you have not committed a crime, you will simply have to give back
the goods to the right owner. Now it is you as a buyer that has to go after
the thief for compensation (because he scammed you by selling stolen goods).

------
lambdapie
Insider trading does harm people, and does reduce liquidity. Many people who
understand classical economics get this wrong [0], because financial markets
are a very degenerate kind of market from the point of view of classical
economics.

The fundamental error in all cases is to conceptualize insider trading as
buying _from someone who would have bought /sold anyway_. This is precisely
failing to think at the margin. It is as erroneous as saying "eating meat is
ok because those cows would have been killed anyway". Put more technically,
when you buy a share, you do so by shifting up the demand curve a tiny bit,
with your demand, which in turn shifts the price slightly up and causes a
seller to sell, who would not otherwise have. Market microstructure, together
with the fact that supply/demand curves really form a single curve, can
obscure this fundamental economic fact.

Given this, insider trading does cause harm to some people. And how could it
not? If a person can make money from insider trading, then, to first order,
someone else must lose money. There are some externalities from information
revelation, but only a tiny fraction of these benefits go to the marginal
buyer/seller who lost out because of insider trading.

How does this compare to public releases of information? Well unlike insider
trading, public information can shift prices without any transactions
occurring (or in practice, very few). This is because while insider trading
only moves the price by the mechanism of moving the supply/demand curve, while
public information is revealed to all traders at once.

So while insider trading does reveal information (which is a good thing) it
does so in a way that reduces liquidity, because people don't want to be on
the wrong side of insider trading.

I'll admit that the above narrative isn't watertight. I think it's the best
analysis that can be done verbally. The only models that allow a meaningful
discussion of welfare in the context of financial markets are so called noise-
trader models, which explicitly model the (irrational) reasons why most people
trade. The whole field is vastly complicated by the fact that theory predicts
almost no trade in stocks if people were completely rational.

[0] [http://www.marketwatch.com/story/why-insider-trading-
should-...](http://www.marketwatch.com/story/why-insider-trading-should-be-
legal-2011-05-17)

~~~
bobcostas55
You completely ignore the benefit of the more accurate price.

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.

~~~
Natanael_L
But there's also bad incentives tied to it - with inside information, you're
incentivized to keep others in the dark so that you can maximize the impact of
your trades. Things like borrowing money to short stocks in a company likely
to go bankrupt, while telling people to buy.

~~~
JacobH
Telling people to buy stock you shorted is a bad idea. You're goal is for the
stock to go lower.

~~~
lmm
Yeah but conversely you want to talk the price up _before_ you lock in your
short so that you get in at a better price.

------
Dylan16807
If "material nonpublic information" is illegal to trade on, then the entire
job of the intelligent investor ceases to exist. It becomes illegal to do
thorough research.

So of _course_ the source of the information matters.

I'm sympathetic to the argument that it's bad to take illegally obtained data
and pass it along in a don't ask, don't tell manner to avoid prosecution. But
that Dell data? The guy's _job_ at Dell was to share company info with
investors. To say the information was obviously dodgy is total nonsense.

~~~
notacoward
> It becomes illegal to do thorough research.

Ridiculous. Having access to information others don't is privilege, not
thoroughness. You can be just as thorough as you want, so long as others are
not prevented from being likewise. Without that, capital markets cease to be
open. That way lies oligarchy.

~~~
Dylan16807
You can figure out information other people don't have through pure diligence,
without privilege.

~~~
dllthomas
Required diligence doesn't make information non-public.

------
gtani
Profs Fischel and Easterbrook were working on the analytical framework
(efficient continuous release of information, if i remember), starting in the
80's:
[http://www.law.uchicago.edu/node/514/publications](http://www.law.uchicago.edu/node/514/publications)

------
nanis
If everyone with inside information could trade on it without fearing the law,
they would reveal the predicted effect of said information via movements in
the price of the security.

Therefore, free and legal insider trading would actually increase fairness in
the market.

~~~
hristov
Nope, what would happen is that everyone without inside information would
simply not trade in that security. You would not have a stock market because
only people that know the company very well would dare buy stock in it. The
cost of capital for companies would skyrocket and the US economy would tank.

It is amusing to me how when all these amateur game theorists create these
hypotheticals to prove that insider trading is good, they always assume that
there is an endless supply of chumps with an endless supply of money willing
to take the opposite end of the trade. Well, let me tell you, people are not
that stupid. Especially people with money.

Back in the dark ages, most people with money felt the best place to keep them
was locked in a chest in the deepest room in a large castle. There was very
little investment, and the dark ages were a time of extreme poverty. It is
only through a long series of laws and institutions developed over couple of
hundred of years, that we have reached this point of mobility of capital,
which allows capital to go where it is most useful, and greatly benefits the
economy. But if we remove investor protections things can slide back very
easily and very quickly.

~~~
eru
Have you actually looked into stock markets (in other places and other times)
that did not penalize trading on insider information?

~~~
GhotiFish
That question almost reads like a criticism, but I'd like to throw my hat into
the ring here and say I'd like to know how markets cope in this situation. Do
we have real world examples?

~~~
eru
Lots of real world examples. Eg Japan and Germany still have lighter
regulations on insider trading, and in the US and UK people used to trade
before insider trading was banned.

Insider trading probably ought to be thought about when designing regulations
---but I am not convinced either way that it should be banned.

------
maxxxxx
The only chance for the regular guy to make money for retirement is through
the stock market. No pensions and polices like 401k and low interest pretty
much leave no other chance.

I am fine if Wall Streeters rip off each other but with the regular guy pretty
much forced into the stock market I think there should be very tight
regulation and certainly no insider training.

~~~
wj
What is a 401(k) if not participation in the stock (and/or bond) market?

~~~
maxxxxx
That's my point. 401k pushes people into the stock market.

~~~
wj
Ah. I misparsed your sentence.

------
jostmey
I naively assume that the only way to succeed big in wall street is to rely on
insider information. The rules against insider trading only hurt those trading
at home believing the playing field is level. But I don't know how it really
works.

~~~
lmm
In a perfectly efficient market with perfect information there's no profit to
be made. So to make money you either have to be more efficient - either by
market-making where you do millions of small trades, or the kind of value
investing where you just buy what other people are selling and vice versa and
hold them for a while - or you have better information. (Which doesn't have to
mean inside information. It's certainly possible to make a living out of good
old-fashioned detective work based on public information - recent clever
tricks have been e.g. tracking the tail numbers of CEOs' private planes to
know when they're on holiday and/or negotiating a merger).

~~~
jostmey
A perfect market, which is a stupid assumption, can indeed make profit. You
are assuming that an economy is a zero sum game but it is not. Transactions
are made because both parties come out ahead.

~~~
netheril96
Economy _is_ a zero sum game in a perfect market. It is not a zero sum game
because markets are not perfect.

~~~
hawkice
This assumes (quite wrongly) that the same goods have the same utility across
the population. It's similar to saying, in a perfectly efficient economy,
there would be no trades. There are, because there is a benefit to that trade
-- and there is no reason for that benefit to be evenly distributed.

------
mark_l_watson
Insider trading is just one more thing that increases income inequality. Not
surprised that the Supreme Court passed on this.

A little off topic but I am so pissed off that US Congress members have passed
laws that make themselves and their assistants immune to being prosecuted for
insider trading.

You know the system is getting more corrupt when such bad behavior is not even
hidden from public view.

~~~
tptacek
Hold on. It's not the market's job to correct for income inequality. It's the
job of a market to rapidly incorporate information into prices, so that
everyone who needs to participate in commerce can do so with a shared picture
of the value of different things.

Income inequality may be worth correcting for (I sure think it is), but it
does not follow from that view that markets should be distorted to try to
accomplish that. There are plenty of other instruments we can apply to that
problem that will be more effective and will harm the economy less.

------
mbcz0
[http://www.wsj.com/articles/SB100014240527487042240045744893...](http://www.wsj.com/articles/SB10001424052748704224004574489324091790350)

------
jessaustin
Unfortunately the headline is mistaken. Insider trading law was only ever
intended to reserve for senior executives the privilege of trading on inside
information. This latest interpretation is a confirmation of that purpose, not
a repudiation of it. Bharara has been a true believer, but if he's going to
stray from the South Asian beat, he's going to have to learn the _real_ rules.

~~~
lambdapie
What does "if he's going to stray from the South Asian beat" refer to?

~~~
jessaustin
Perhaps I'm influenced by those cases that the news media has chosen to
publicize. Clearly Mathew Martoma would still be "guilty" under the newly-
clarified rules. I really wonder about e.g. Raj Rajaratnam, Anil Kumar, or
Rajat Gupta, however.

~~~
mrchicity
Didn't Gupta sit on the board of public corporations and slip Rajaratnam
earnings information right after a board meeting? That seems about as clear-
cut as it gets. Gupta had a clear duty of confidentiality serving as a high-
level executive and the information was obviously material to the share price.
You don't get much more material than quarterly earnings.

------
runn1ng
Not related to the actual article, but I got stuck on the word "coöperating".

Originally, I thought the "Umlaut" is a typo or a mistake, but, according to
wiktionary, "coöperate" is an actual word! I still feel like pronouncing the
second "ö" like in German though.

~~~
nostromo
It's called a diaeresis.

Used in this way, a diaeresis tells the reader that it's pronounced as "co op"
and not "coop".

[http://www.newyorker.com/culture/culture-desk/the-curse-
of-t...](http://www.newyorker.com/culture/culture-desk/the-curse-of-the-
diaeresis)

Most people would just write "co-op" nowadays -- I've only ever seen this in
the New Yorker.

~~~
rdancer
Just to add further explanation, it's the same reason we write naïve: to hint
it is to be pronounced /na-yeev/, not /neivə/.

------
kawera
Same article posted yesterday:
[https://news.ycombinator.com/item?id=10483032](https://news.ycombinator.com/item?id=10483032)

~~~
Dylan16807
I'm sorry you didn't get upvotes out of randomness or timing but it doesn't
help to link a previous submission with no comments.

~~~
kawera
Thanks but I'm not looking for upvotes, I just wanted to signal that the dupe
detector isn't working very well since it's the same title and url and have
been posted only hours before this.

~~~
dang
Please see the FAQ. It doesn't count as a duplicate until the story has had
significant attention on HN. If we didn't have this rule, many good stories
would go unnoticed because there's so much randomness in what gets liftoff
from /newest.

[https://news.ycombinator.com/newsfaq.html](https://news.ycombinator.com/newsfaq.html)

Edit: One side-effect of our recent experiments in resuscitating solid
articles is that it increases the number of reposts in the story stream. Given
the number of comments we've seen about that, it seems users don't like this,
so we've begun working on an alternative approach.

------
oldpond
Bring back the Inquisition for these guys.

------
marincounty
Could an attorney chime on on this article? I'm hung over, and a bit fuzzy.
Yea--Halloween!

"It’s not that it will be impossible to bring insider-trading cases from now
on; it’s that, at a hedge fund, all of the legal liability will now rest with
the analysts and traders on the front lines of information gathering—with the
initial knowing recipients of a tip. (Incidentally, if you’re a junior
portfolio manager, this might be a good time to ask your boss for a raise?"

1\. This means anyone, such as a home trader, hires a worker who receives
insider financial tips from and passes that information on to me. I can then
make the trade, and profit. I am legally protected, as long as the employee
didn't tell me about the origins of the tip? The only person liable would be
the employee?

"With billions of dollars to be made in betting on the market, whether or not
you see cause for alarm in any of this will likely depend on just how
scrupulous or unscrupulous you think the average investor is."

Of course the average investor is unscrupulous. For as long as I can remember,
the successful investors used insider information to make money on
investments. Growing up they openly exchanged tips at church functions. Hell,
the only real money my father made in the market was off an insider tip. My
father didn't even know it was inside information. He just trusted his new
father in-law.

My point is ever successful trader, I tangentially knew, used insider
information to make a profit.

My second question to the lawyer. The boys at Google/Bing can see every every
IP. They can map every IP to an address, and most likely a name. They probally
know exactly who's who in all financial institutions throughout the world.

Could Google/Bing hire an analyst to scrape the data/information are pass that
information to a higher up. The "Higher ups" could then make stock trades on
this in data. (yes--I know Google only scrapes information in emails for
"advertising" data.) 2. Could, if a search engine was combining IP to a name,
address, and maybe where an stock trader works. Could The search engine put
all that info. together and use that information to buy stocks? They might
even call it big data mining for financial gain?

Or, would this senerio be invasion of privacy, and wiretapping?

(I have two questions poorly laid out in this mess of a paragraph. Sorry. I
will number the sentences with my final question, as 1, and 2.)

