Why Is Insider Trading Even Illegal?

TIME ^ | 07/28/2013 | Christopher Matthews

[SeekAndFind]

Ever since the financial crisis, U.S. regulators have been hard at work putting away Wall Street financiers who play fast and loose with the law. The only problem is, those Wall Street crooks that the feds have been cracking down on aren’t those who actually caused the financial crisis, but a different breed of white collar criminal: inside traders.

As Charles Gasparino explains in his new book on insider trading, it’s largely coincidental that the fed’s recent crackdown on the practice — which includes yesterday’s indictment of the hedge fund SAC Capital – is taking place in the wake of the worst economic recession in several generations. But the coincidence does provide opportunity to ponder why — given the fact that insider trading isn’t anywhere near as pernicious a crime as some other white collar shenanigans — the government spends so much time and energy trying to stop it.

n fact, there are large number of professional economists and legal theorists — albeit generally of the libertarian persuasion — who feel that insider trading shouldn’t be illegal at all. Doug Bandow, a senior fellow at the Cato Institute, for example, writes:

The objective of insider trading laws is counter-intuitive: prevent people from using and markets from adjusting to the most accurate and timely information. The rules target “non-public” information, a legal, not economic concept. As a result, we are supposed to make today’s trades based on yesterday’s information.

Unfortunately, keeping people ignorant is economic folly. We make more bad decisions, and markets take longer to adjust.

He goes on to argue that the goal of insider trading laws, which is to promote a fair stock market, is misguided.

[cripplecreek]

If it were legal, lobbyists would lose much of their power over the congressmen they own.

[gov_bean_ counter]

If you have to explain it to him, he wouldn’t understand anyway...

[wideawake]

It should be obvious. If investors believe that no amount of research or deliberation they put into investing matters, because key information they have no way of knowing is being used to manipulate them, they will not invest as much in stocks.

That means it will become more difficult for new companies to raise capital and economic growth and incentives will slow.

If own a share of a company, I am an owner. And if the managers who work for me are funneling information to certain owners and keeping it from me, making side deals and creating conflicts of interest, they are defrauding me.

[The_Reader_David]

The real question is not, “why is insider trading illegal?” That has a good answer: Real insiders are people who are employed by a company and thus have a fiduciary responsibility to the shareholders. Using information they are privy to as insiders to profit by trading in the company’s stock will necessarily allow them to profit at the expense of those to whom they have fiduciary responsibility. It is thus a subtle form of covert embezzlement.

The real question is why American law defines “insider trading” in such a broad way that folks who have no fiduciary responsibility to the shareholders of a company can be charge with and convicted of insider trading simply because they traded on the basis of sound information. For that there is no good answer in terms of justifying the state of the law, and doubtless the answer by way of explanation involves some unsavory coincidence of guild interests on the part of some part of the financial industry and the political interests of those who want to expand the reach of the state.

[UCANSEE2]

I think that the Insider Trading Laws were created by politicians to ensure politicians had 24 hours to rearrange their portfolios before public announcement of decisions.

[Gluteus Maximus]

It's based on the "rational markets" theory. Basically, this theory asserts that markets rationally price a commodity (stock, bond, etc.) based on all the information known at the time. Since public exchanges are based of necessity on public information, trading on non-public, "insider" information is seen as distorting the free market mechanism and such "insider" trades are to be regulated out of the market.

I personally think that the theory is deeply flawed. Markets aren't rational. They're as much emotion as anything else. Indeed, most of the trading is done by computer programs and those programs are based on Elliot Wave Theory, which is all about the markets being an irrational (but comprehendible) force of nature.

Should insider trading be allowed? I don't know. I think that there's a larger question of how much abstraction should be allowed in a free market system. I mean, if the regulated stock market is largely irrational, how much more irrational is the unregulated multi-trillion dollar derivatives market?

I believe that the Founders really had Main Street in mind when they devised this thing. I suspect that most of them would have been very suspicious of Wall Street.

[DoughtyOne]

Why shouldn't Black kids be able to kill other Black kids?

Why shouldn't Black kids be able to beat someone's head into the cement?

Why shouldn't Obama be able to run up $1.5 trillion dollar deficits?

Why shouldn't Obama be able to destroy our military?

Why shouldn't Obama be able to talk down the U. S. whenever he is overseas?

Why shouldn't Obama bow from the waist when greeting dignitaries from other nations?

Why shouldn't Obama be able to talk about ongoing court cases in public, seeking to shape public opinion?

Why shouldn't 40 million U. S. workers be out of work?

What difference does it make now how Hillary Clinton handled the Benghazzi mess?

Why shouldn't insider trading be legal?

These and other questions will be answered when hell freezes over, because if you have to ask, you're too stupid to handle the answers.

Ramirez's political cartoon "daily dose" 07/28/2013: LINK

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[Publius]

I suspect that most of them would have been very suspicious of Wall Street.

Except for Alexander Hamilton who founded Wall Street as we know it.

[mylife]

[SeekAndFind]

I’ll borrow the argument from the Washington Post...

The first question when evaluating any criminal law ought to be, “Who does the practice this bans hurt?”

The obvious answer is uninformed investors.

Let’s say that I’m walking around the newsroom and hear that IBM is about to post really big losses for the previous quarter.

I rush to my computer, log onto eTrade and sell a bunch of my IBM shares. When the stock drops following the public release of the loss figures, the poor schmuck I sold the shares to is out a bunch of money. He’s the victim; I shouldn’t have shafted him like that.

But wait a second — what was that guy doing buying and selling individual shares of IBM in the first place? Doesn’t he know that your odds of beating the market as an individual investor are ridiculously low? He should just throw his money in an index fund like everybody else.

That’s the problem with insider trading bans. They are justified as providing an even playing field for small investors, but obviously such a playing field doesn’t exist.

You really don’t stand as good of a shot of beating the market as a guy with an E-Trade account as you do when you’re, say, Steve Cohen (currently under investigation for Insider Trading). So you shouldn’t try.

Making insider trading legal would make it clearer to individual investors that picking and choosing stocks is a sucker’s game, and deter more of them from trying, to their financial benefit.

Keeping it banned creates an illusion of fairness that leaves everyone worse off.

[BwanaNdege]

Simple solution.

Put a one week (or more) delay between Buy or Sell orders and execution of the sale. This would rive the speculators crazy, but it should bring a bit of dampening to the wild swings of the market.

(This is an uneducated suggestion by a non-player in the market)

[GeronL]

Is it illegal for Congress?

[TArcher]

>>Why Is Insider Trading Even Illegal?

 

Hos 12:7-9
7 The merchant uses dishonest scales; he loves to defraud.
8 Ephraim boasts,
"I am very rich; I have become wealthy. With all my wealth they will not find in me any iniquity or sin."

9 "I am the Lord your God, [who brought you] out of Egypt;
I will make you live in tents again, as in the days of your appointed feasts.
NIV

 

Same ol'

[RetiredTexasVet]

Remember, this is selective enforcement. You don’t see any indictments for notorious inside traders .... can you say Soros? Corzine walked away without a single criminal indictment when even an incompetent half-wit like Eric the Corrupt could have successfully prosecuted him.

[TArcher]

>>You don’t see any indictments for notorious inside traders .... can you say...

...Subprime Ambassadors to the Netherlands for 5 million, Alex! 

"Oops"