Price discovery is a major function of markets, insider trading adds more information and benefits all parties by allowing for more accurate pricing of whatever is being traded.
Insider trading is a distortion of price discovery, because the insider possesses knowledge the rest of the market does not. That's why it's illegal.
Insider trading is not real buy-side demand pricing information because the insider (typically) intends to sell as soon as the price pops, once more market participants have been pulled into the trade because it's going up -- key knowledge the insider knew the market did not.
Markets as a price discovery mechanism relies upon all participants having access to the same information. Insider trading clearly breaks that fundamental rule.
> Insider trading is a distortion of price discovery, because the insider possesses knowledge the rest of the market does not. That's why it's illegal.
Insider trading is not illegal because insiders possess knowledge the rest of the market does not.
Insider trading is illegal because it creates a false perception of unfairness among less sophisticated market participants. (There are other decent reasons too, Matt Levine has written about this extensively too. Yours isn’t one of them)
> Markets as a price discovery mechanism relies upon all participants having access to the same information. Insider trading clearly breaks that fundamental rule.
This only makes sense in a context where all parties have access to equal resources, but that’s not true. A hedge fund paying visa for transaction flow, or flying spy planes above a factory to track production will have more information than other participants.
You're so far down the contrarian rabbit hole on this take, you're arguing the nuances of why, precisely, insider trading is illegal. It doesn't really matter why, it is, and for good reasons (agree with or don't, whatever). This ain't the hill.
That's obviously not what I'm saying; you're being difficult for the sake of argument. I've already stated why insider trading is and should be illegal.
They're literally arguing it from the selfish position of an insider trading rather than from the general societal and market benefits. I agree with you 100%
Insider trading can lead to more accurate pricing at a particular time by releasing information earlier than it otherwise would have been released (albeit selectively in a way designed to maximise harm to people on the other side of the trade the insiders usually have some sort of fiduciary duty to).
It also creates incentives for insiders to act perversely to profit from asymmetric information, including acting with the intent of creating less accurate pricing at a particular time in order to create trading opportunities for insiders.
Suffice to say the dominant trend in crypto markets is not rapid convergence on a relatively stable price...
> (albeit selectively in a way designed to maximise harm to people the insiders usually have some sort of fiduciary duty to).
That doesn’t make any sense, prices go in both directions. If price goes up, there’s no harm to people who the insiders may have some fiduciary duty to.
> It also creates incentives for insiders to act perversely to profit from asymmetric information, including acting with the intent of creating less accurate pricing at a particular time in order to create trading opportunities for insiders.
In the US that’s just called “wire fraud” and not “insider trading”.
> That doesn’t make any sense, prices go in both directions. If price goes up, there’s no harm to people who the insiders may have some fiduciary duty to.
Of course there is. When prices go up, insiders profit at the expense of shareholders who sell to them. In the absence of insider traders, non-insider shareholders collectively achieve better returns; ergo they are harmed by the presence of insider trading on positive or negative information.
(The only time it wouldn't be the case is if the prices move in the opposite direction to the one the insiders are expecting due to some other unanticipated development which is far more significant than their information advantage)
> In the US that’s just called “wire fraud” and not “insider trading”.
Much easier to prove the insider trading in the run up to a profit warning than prove an entity was intentionally mismanaged to create that opportunity and its earlier predictions of success were fraudulent and not just incorrect.
If you want insider trading then take the company private and do all the trading you want. Public companies and investors should be able to count on insider trading being illegal. The punishments need to much more severe and extremely hard to get out of in court.
If you focus only on price discovery happening in a specific market center, sure.
However, because it’s 2022 and we have the internet and all I’m not sure it really makes sense to focus on specific market centers instead of the market as a whole.
Of course HFT makes this far more complicated so it’s difficult to come up with a clear answer in either direction.
