>I bet insider trading is not as fun when you're unemployed and bankrupt.
Not just unemployed, likely unemployable by any reputable company in the industry.
Also, good on you for having integrity, but honestly what you say is too much for the average person to be tempted with. Does anyone have a solution for lowering that temptation and making these scenarios less likely?
> but honestly what you say is too much for the average person to be tempted with.
I think you underestimate the “average person”. Most people basically want to be good. Everything works better when that is the case — basic game theory.
You see the punishment / pressure about unfairness start in early childhood. You see it in the infrastructure where this is overwhelmingly the case (e.g. shops with unguarded back entrance/exits) vs where not (armed guards outside the shops).
And of course the news (cf the current HN conversation on that topic) focuses on the exceptions to the rules because, on an evolutionary biology* basis we’re always learning and reinforcing on the normal case so we are interested in the exceptions.
people want to be good but debt and financial problems can negatively impact judgement. people take risks when they are desperate.
I’m sure it happens all the time, we just heard about the ones who got caught.
Personally I would never do it as I can make much more by keeping my job and the field I’m in is all about ethics and integrity. I would rather hustle with contracting or job shop to get a raise if I really needed the money.
> people want to be good but debt and financial problems can negatively impact judgement. people take risks when they are desperate.
Tech ( corporate ) pays well enough that anyone with reasonable cost of living and lifestyle shouldn’t resort to extreme desperate measures. The rest is greed. The fact these people have money to play with stocks already shows they’re much better off than the average person.
People who are in an insider position at a publicly traded company are generally getting compensated well enough that they do not need any more. They may want more but most folks get by with much less.
In the US, all it takes is a run in with the legal system or emergency medical bills, and virtually anyone could find themselves in dire financial straights.
Most of the time these stories are reported, there is no indication that the motivation is paying back medical debts. Actually I've never seen it. It's normally gambling or drugs. I agree an insider with medical debt is a theoretical problem, but it doesn't seem to be an actually common occurrence.
I think it's a lot to be tempted with, but it's also relatively easy to stay in compliance: don't trade your company's stock during black out periods, don't talk about revenue with friends or family, and be vigilant about not publicly discussing your information. It's not a complicated code of ethics, fortunately.
You can obfuscate CII (Company Identifying Information) as much as possible. Limit the reveal to those that need to know. Auditing, and making employees aware you can see what they do with data might reduce the temptation because the risk of being discovered is (perceived to be) greater.
Unfortunately I need to know, because if the numbers are off I need to help fix them. I do take my responsibility to keep revenue numbers within a small group of people very, very seriously, because who knows if someone else would be too tempted to act.
This reminds me of the problem before we had the cash register (which Charlie Munger has talked about quite a lot). It was a constant problem, most people companies had a lot of theft. The constant ease of access was just too much for most people to do, adding in a cash register reduced this theft by a lot. It's unlikely these were "bad people" by most definitions, undisciplined, perhaps they meant to repay it, perhaps they had a serious ill.
We need a modern day equivalent of a cash register.
It depends on your definition of the problem. The problem I would like to solve is ensuring that everyone perceives the market as fair, i.e., not tilted toward parties with access to privileged information.
> not tilted toward parties with access to privileged information.
With the exception of Congress of course.
Reverse insider trading is also fine, you can announce buybacks right before a preplanned stock sale.
It would be simpler to say if you aren't friends with someone invited to Epstein island you aren't allowed to insider trade but the plebs would get uppity.
Banning Congress from making stock trades has broad bipartisan support[1]. Absent any evidence that the person you're responding to doesn't support a Congressional ban, it's probably safe to assume that they do.
This implies a truly bizarre understanding of markets and fairness.
Was it fair when Enron was valued at $70B? Would the situation have been less fair had insider traders with more information pushed the prices down earlier?
Insider trading doesn’t cost anybody anything, it simply allows for more accurate pricing which benefits everybody.
> Insider trading doesn’t cost anybody anything, it simply allows for more accurate pricing which benefits everybody.
Insider trading has an institutional cost: it's corrosive to trust in the market. Retail investors are less likely to make optimal investment decisions if they think that insiders are lurking around every corner. That trust is further diminished if retail investors believe that insiders are not just investing based on insider information, but speculating on higher-order instruments.
It's perfectly fair to note that our current regulations against insider trading aren't ideal, and that the SEC only catches a tiny fraction of all insider trading. But the threat of enforcement does serve as an important root of trust in the market, and removing it is unlikely to serve individual investors well.
> Retail investors are less likely to make optimal investment decisions if they think that insiders are lurking around every corner.
But the reality is that there are insiders lurking around every corner. The argument is essentially that we should seek to actively mislead retail investors instead of simply acknowledging this fact.
I think it would be dishonest to do so actively, which is why I try to acknowledge that the SEC's current ability to enforce insider trading laws is relatively weak and ineffective.
I think it's my civic duty to not only inform others of that fact, but also to advocate for better enforcement.
Good enforcement is impossible. You can never meaningfully hinder insider trading, far too many people have access to insider information. They don’t have to make the trades themselves either.
> I think it would be dishonest to do so actively
That is what the government is doing via legislation.
Good enforcement isnt impossible. Improbable, yes.
Every trade has to be disclosed. There isn't a block-chain involved, but their is an e-paper trail. We are on a technology forum in a time where ten people could probably put together a domain model that tracks potential conflicts based on peoples trades, google contacts, and linkedin profile. And any person who traded on insider information in the past probably leaves a pattern.
Fine, this feels needlessly pedantic but let me correct myself.
Good enforcement is impossible without subjecting anybody trading stocks and everybody they know to a completely unprecedented level of surveillance. This would have to go far beyond the wildest Snowden revelations.
Perhaps not completely impossible in theory, but absolutely infeasible in practice. Building such a system would also be likely to result in far greater chilling effects on the markets than insider trading ever could.
> enforcement is impossible without subjecting anybody trading stocks and everybody they know to a completely unprecedented level of surveillance
Why? Just look for a pattern of abnormal returns. (Hint: the SEC does this.) It's much easier to check for insider information after the fact than it is to profitably trade on it.
So, if I were a trader at Enron who made good money trading electricity and gas then used that money to short the stock based on private information, I'd be doing everyone a service and fighting for fairness. Better yet, I could be one of their auditors at Arthur Andersen.
Oh, please. You wouldn't be doing everyone a "service" because you'd be making money (or at least losing less) than the other investors - you'd have a material advantage. If you truly wanted to do the world a service, you would have just publicized their fraud and taken a bath along with everyone else.
But the economic award is just the cost of a more correct market price and it happens all the time.
For example a mask manufacturer. They might have a relative in China who shares information about the outbreak of a new virus. Manufacturer uses this completely legal information to produce a ton of masks and makes record profits off the sales because they're right. But the public benefits as well because there are actually masks to purchase.
And another example are whistleblower payments. We have no problem giving whistleblowers millions of dollars for uncovering fraud because the cost is far lower than the benefit.
I think the point that they're making is that there wouldn't be a large opportunity to short Enron if people were insider trading from the very beginning. The price of the stock would be more accurate from the beginning, because people would trade at the first sign of an opportunity to benefit from insider information.
Personally, I think the argument is interesting. Let us split it into technical and cultural concerns.
A market changes according to flow and distribution of public and private information. The more publoc information, the more accurately priced the stock. Insider information increases public information indirectly through trading said stock.
From a cultural standpoint, many people do not trade on insider information because it is seen as unfair or immoral. A number of people abstain because it is illegal. Some do trade based on self interest and the disproprotiate personal gains to risk involved.
Nowhere, in any of this is the quality and manner of disclosure. Ultimately, it just creates another financial game where people race to see who can get the information quickest.
Needless to say, the systems of reporting in corporations would adjust and the largest share of gains would be made by those who have large holdings of stock. At the same time, it takes away a measure of enforcement and adds traders who were deterred by laws and morals.
Is it likely for you to get caught for insider trading? Probably not.
Especially if you're Joe Blow and you make 10k on this. If you are Joe Blow making 10k also means you did not have a lot of "play money" to act upon overhearing some random conversation. Or you do but didn't trust it fully (how did you know it was 'material' and not just some guys at a business lunch 'boasting' to each other?) and just did it to test waters or have fun.
The larger the sums get I would argue the more likely it is you will get caught because it means you are probably much closer to the actual information than meets the eye. Or it gets caught in some filters based on amount and such that someone starts looking at etc. If you really just completely randomly overhear something like this, how do you judge that it is 'material'? Is someone going to bet his entire savings account on a completely random encounter of overhearing Bill Gates and Warren Buffett discussing something 'material' over lunch and they are in earshot range? And here we are talking major celebrities that probably even Joe Blow would recognize and judge as 'probably material'.
You know what? Even though it's still immoral I totally wouldn't judge Joe Blow betting $100 to make $10.000 on that and put it on the mortgage. He probably bets that same thing on some Superbowl weird odds bet each year and looses.
More likely? Joe Insider knows exactly when Company X and Company Y are gonna announce some multi billion dollar deal because they've been in talks for months and they work in BI to get the numbers for this deal to them and things seem to be getting close. Get a few trades in with the bonus money or proceeds from the RSUs vesting. Immoral act to make 100k of RSUs into 10 million and be set for life.
Maybe I'm misunderstanding what I can find about this online. Please help me understand. Let's say Joe Blow in my example works as a janitor for said company. For the sake of argument, he's directly employed.
There is no statutory definition of “insider trading”. As defined by the courts, it refers to purchasing or selling a security while in possession of material, non-public information concerning that security, where the information is obtained from a breach of fiduciary duty, or a duty arising from a relationship of trust or confidence.
Obtaining the material information by way of a breach of duty or confidence is the key to an insider trading violation, but after decades of court rulings, it is almost impossible for a court to find that a duty was NOT breached in an insider trading case. Some duties are obvious – the CEO of the company, the CEO’s assistant, and every other employee owe a fiduciary duty to the company and if they use, or disclose, material non-public information, they are liable for insider trading, often even if they didn’t trade themselves.
Over the last 10 years, the SEC and the courts have greatly expanded this definition, to include trading by individuals whose “relationship of trust” is so remote as to be non-existent, but that discussion is left for another day
Would he not count as "every other employee" in the above for some reason? He overhears a conversation between the CEO of his company and another company about a big deal while he's say fixing the heating in the conference room? Nevermind the likelyhood of that scenario and the really bad practice of discussing such matters in said conference room while he's there (or in a restaurant to go back to the other example but then said janitor would need to frequent the same one as the CEO of his company, which is also an unlikely scenario ;) )
That's an interesting perspective. So in a way, insider trading corrects the market because the difference between what is known and what is unknown should not result in a vast difference in valuation.
Exactly. It is the perspective often repeated by economists.
There exists little political will to legalize insider trading because it would be hard to sell to a public that doesn’t even understand why stock markets exist. To the average person on “insider trading” is just bad stuff evil rich people on wall street do.
In reality the arguments in favor of banning insider trading are actually quite weak, usually relying on very vague ideas of fairness and public perception.
But the idea of “fairness” in markets is an illusion anyway, even without insider trading there will always be those with more information. Someone could follow corporate executives to restaurants, eavesdrop on their conversations and trade on that basis. That wouldn’t be illegal insider trading, would it be fair? I personally believe it would be just as fair as illegal insider trading.
I don't have an argument. You don't need to argue to contribute. My contribution was pointing out persuasive writing devices often used to add credibility to one’s argument but are not supported by any logic or reasoning in his comment.
> But it does, it increases information available to the public.
A little less pedantically for those who enjoy repetition and are prone to dogma, more information is not always better. In this case, as is in general, there should be some qualitative analysis, e.g., the type of information, how it was gathered, its method of distribution,...etc.
On another note, the Efficient Market Hypothesis (EMH) is not reality. I say this because you have used several core tenets in your discourse repeatedly. I acknowledge the high probability that I am most likely dealing with a college student fresh out of introductory Macro. Yes, the class is interesting and exciting. Here is a lesson, EMH is a model used to help us reason about the market. Its an abstraction based on an abundance of simplifying assumptions, ceteris paribus. Anybody who does not disabuse themself of this notion that EMH follows reality is a fine and perfectly capable person who may make a lot of money some day (fingers crossed), but they don't really add much to the conversation.
Finally, unrelated to the aforementioned, yet I don’t care to answer any more of your responses to my posts, so I’ll add this here: look up the ‘straw man fallacy.’ I tend to shy away from using biases and fallacies in general discussion, they seem to miss more than they hit. However, my distaste doesn’t stem from those who use them effectively to facilitate when they hold relevance. No, my distaste comes from those who use them as the argument itself. It is lazy and adds nothing to of value, much like allowing insider trading. If you can explain what makes my example of financial auditors' a 'straw man', especially when it was solicited by a general question asking for examples, then you can claim you 'dominated the conversation' / won or whatever this is.
If insider trading is legal, you could actively destroy a company from the inside and profit from its downfall.
Like you could buy put options to set up a leveraged short position, take all the company's money, set it on fire in public(or make a stupid acquisition so you can't easily be sued by other shareholders), watch the stock price drop in a predictable manner, and profit from the predictable decrease in equity.
Sort of like how you can't buy life insurance and then immediately commit suicide and still get paid out.
>Such activities would be criminal regardless of insider trading. What difference could it possibly make if insider trading was legal?
Killing your neighbors with a gun is illegal in both France and US? Here in France, one cannot purchase a gun. Guess what happens when you make gun sale as easy as possible?
Oh but people can own gun, they just should not use them illegally! Right?
There are so many ways they could implement the same thing.
K-mart could stop marking everything "on sale" 100% of the time and make the regular price the discounted price, so people don't feel like they're getting a good deal. Then their sales collapse and they go out of business, because consumers are robots with predictable emotions.
Or the board could look for the absolute worst CEO they can find, thinking to themselves "This guy will surely bankrupt the company if we give him control", and then have all the written documentation being reasons why he's a great CEO and put out press releases bragging about him.
If you look at executives loading up on put options and say "surely that proves intent", then they'll instead call up their old Harvard buddies at Goldman Sachs and tell them all the reasons the new CEO's going to be great. They'll take the hint and load up on puts on his behalf, then 10 years later give him a cushy job at the hedge fund.
Maybe they wouldn't do it to a successful company. But if a company starts declining, has a couple bad quarters... the executives start looking for an "exit strategy", and you just legalized a whole class of them if they accelerate the decline as long as it's too hard to prove intent.
If you try to ban specific examples and legalize the general principle, they'll spend years of their life arranging for companies to be bankrupted in ways that are hard to prove illegal. There'll be documented "good reasons" for everything, but despite that they will be millionaires and their companies failures.
You can't look at the most obvious case and say "we'll just ban that". It's not how these people work - they are reading the law and planning around the edge cases.
They're only "obvious" frauds if I'm sitting here writing a paragraph describing it like one.
There is a global feed of press releases that companies release into, and the average HN commenter is incapable of distinguishing frauds from real better than anyone else. The executives that make these press releases use different language that doesn't describe it as fraudulent, and this makes it non-obvious.
If the "trading profit" is the only signal you have, I'm sure Goldman Sachs can come up with a way to make it less obvious than "buy lots of short-term expiring put options on your own company". You can't look at only the obvious case - you have to look at all possible things all finance people can do and rule out any possibility of profiting from a downwards movement that was engineered. Otherwise, they will profit from the gaps in your ability to detect them.
In order for something to be a crime, it has to be proven "beyond reasonable doubt". Say with 90% certainty. That is, 2 bits of certainty. But you can make a trading profit while leaking 1, 0.5, or 0.1 bits of certainty. It is extremely difficult for non-specialists to detect a trade pattern based on a leak of 0.1 bits of certainty.
Insider trading isn’t the only potential motive for an action like that. A competitor could pay a mole to help them get ahead by taking down the competition, for example. I’m skeptical that insider trading law plays a significant role in preventing schemes like this from occurring. The entity with the strongest incentive to prevent a company from being sabotaged is the company itself. Insiders can complain to regulators or prosecutors if they think something like this is happening, and that’s pretty much the only way they’d find out.
"What’s odd is not that insider trading law is about theft; what’s odd is that it almost looks like it might be about fairness, and that people think it is."
"One thing that I often say is that insider trading is not about fairness, it is about theft. Whenever an insider trading case is announced, the prosecutors will make a little speech about how financial markets have to be a level playing field, and how the insider traders are cheaters who got the answers before they took the test, but it is all nonsense. Financial markets are not a level playing field; some people will always have faster computers or better resources or more money to spend on research than others, and they should have incentives to find out information that other people don’t have. But more important, the level-playing-field stuff is just not the law. The law doesn’t say that any time you trade on material nonpublic information it’s illegal. The law, to oversimplify a complicated area, makes it illegal to trade on material nonpublic information that you obtained in violation of a duty to someone: It’s illegal for corporate executives to trade on corporate information for their private gain, or to give that information to their buddies in exchange for a personal benefit, or for outsiders to obtain information in confidence and then betray that confidence by trading on it. The real issue is never whether the trading was unfair to the people on the other side; it’s whether the information was misappropriated from its rightful owners."
So how do you make sure the rightful owners have access to the same information?
> Financial markets are not a level playing field; some people will always have faster computers or better resources or more money to spend on research than others,
This is wrong. Being better than someone else doesn't make the playing field unlevel.
Prices are a function of number of market participants and information of each participant. If insider trading is legal, fewer people will participate in the market because they will lose out due to information asymmetry and this will lead to pricing inefficiencies. What’s interesting is that what others are willing to pay is key public information as well.
> If insider trading is legal, fewer people will participate in the market because they will lose out due to information asymmetry and this will lead to pricing inefficiencies.
This only makes sense in a world where regulators can effectively prevent insider trading, that’s not the world we live in though.
Does it really? We have a lot of laws and activities where we know there not perfect, yet we set the right incentives. Having laws against murder does not effectively prevent most of murder from happening.
Their obviously wasn't much thought put in to this. Anywhere that a conflict of interest occurs has potential for abuse. If the officer/employee/agent has the ability to influence the result and profit then their is a conflict of interest. The legal ramifications are lessened and the cost to benefit subsequently decreases.
Auditors are a good example. They have privileged information and are responsible for the fairness of financial information / disclosure. Their incentives are already complicated by the compensation structure, i.e. the company they attest for pays their fee and ultimately decides whether they will work together in the future.
In this instance, an abolishment to insider trading regulation would ultimately undermine trust in the financial reporting system. The auditors could potentially place bets on their engagements and negotiate results based on their interests. Impartiality would be compromised. There are safeguards in place currently, penalties for insider trading are part of the remedy.
It’s important to understand that the usual argument against insider trading isn’t actually about true fairness, but rather the impression of fairness. These are two different things.
The argument that insider trading should be banned because it is somehow disproportionately unfair is quite weak, the argument that it creates an impression of unfairness is a much stronger one.
I personally don’t believe it is a particularly good argument, but it is certainly the strongest version of the argument against insider trading.
What about radical transparency: public companies should have constantly visible numbers to everyone. Eliminate the advantage and equalize players.
It's the disparity in revenue information, chunked into quarters, that causes the problem. Some people feel entitled to have early access but that's the problem.
There's no single solution, but I think it comes down to a combination of annual compliance training, decent remuneration, being aware of your team's personal situations, having auditing systems in place and monitoring employee engagement scores as a proxy for job satisfaction and trustworthiness.
There is no solution better than the current ones. After a company I worked with was acquired by a public company, I was given a role that included accessing to sensitive information in financial dbs. Along with that was a welcome email from the chief counsel, then every quarter came emails listing blackout dates. I nave traded in the company’s stock or options, but it would have been incredibly clear when I was prevented from doing so.
Some companies will also work with the financial group they administer their equity and ESPP through, so you literally -can't- trade on certain dates. You probably shouldn't be buying company stock outside of those anyway, given the limited trading windows, the scrutiny, and the lack of diversification.
Not just unemployed, likely unemployable by any reputable company in the industry.
Also, good on you for having integrity, but honestly what you say is too much for the average person to be tempted with. Does anyone have a solution for lowering that temptation and making these scenarios less likely?