Talk:Insider trading/Archive 1

message: Is this entirely based on the situation in the USA, or generally applicable?
The rules are not uniform round the world. Reporting standards, practices and loopholes vary considerably among jurisdictions.Two16 13:36 Jan 11, 2003 (UTC)
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Two justifications of laws against insider trading were recently posted on Wikipedia:Help desk. I quote them here so I can demonstrate the kinds of questions that I'd like to see answered in this article:
First we have
:Information wants to be free but you can make lots of money if its not freely known. The game is rigged towards those with connections.  The laws against insider trading are lip service paid to honesty.
"Information wants to be free" is an odd claim if you take it literally; I've certainly never seen, say, a volume of Britanica risk life and limb trying to escape from a totalitarian country. Presumibly this "really means" something else, perhaps that people want information to be free, or that information "naturally" replicates itself frequently. Nothing too big seems to follow from these, especially the second.
"The game is rigged towards those with connections" is most certainly true. Not just in financial markets, but in terms of getting a job, being asured of having someone to take care of you when you're old, and in most other areas of life. The question is: is this always a bad thing? Not everyone would answer yes, so a more careful investigation of when it is a bad thing is needed.
Also, I see no necessary connection between insider trading laws and "honesty". The only reasons insider traders have to be "dishonest" (i.e. have to hide the truth) are the laws that make their activities illegal, and the general consensus that they are somehow immoral. Without the current sorts of laws and social pressure, people could engage in all kinds of insider trading perfectly "honestly".
Next we have
:the claim that markets are efficient allocators of resources rests on the condition that people have equal access to information (some claim that markets would be the most efficient way to allocate resources if all people had perfect information).  When you have insider trading, some people have fundamentally different access to information than others, so the market cannot work efficiently.
Obviously this can only be proved for a particular technical definition of efficiency, and given particular assumptions about how the market works. Unless you're going to mention what kind of efficiency this is (so other questions like "efficient for whom?" and "is this actually a very valuable kind of efficiency?" can become meaningful), an efficiency argument is complete gobledegook. Also, it is clear that the ideal of "perfect information" can never be realized in a real market, so your argument had better take account of different degrees of information freedom.
--Ryguasu 01:40 Jan 11, 2003 (UTC)
The legal justification for making only certain types of insider trading illegal (not all of it is banned) is precisely in the breach of loyalty and trust.  The management of a company is hired by the shareholders to earn profits for the shareholders.  If the management uses the resources of a company (e.g. inside information) to personally profit to the detriment of the shareholders (who don't have the same access to that inside information), how is that conceptually any different from embezzlement?  --Stephen C. Carlson 03:13 Jan 11, 2003 (UTC)~
Stephen, could you clarify which of these I am to read from your comment:
:Insider trading is only illegal when it is detrimental to shareholders. (So if a CEO benefits from an insider trade but the shareholders are not "harmed", then would not be illegal.)
or
:The sorts of insider trading that are illegal are usually detrimental to the shareholders.
or
:The sorts of insider trading that are illegal are always detrimental to the shareholders?
In either case, how am I to read "detrimental to the shareholders"? Do courts of law have an established principle for this? "If the stock price drops" seems a little simpleminded. --Ryguasu
I think it would help things if you would answer my question first and not get bogged down on side issues.  Do you consider the conversion of the company's assets for personal gain (e.g. non-public information that one has been entrusted with, in the case of illegal insider trading) a form of embezzlement?  If not, why not? Stephen C. Carlson
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64.229.10.253 At the help desk  I gave a snappy answer to a complex question. It's not so shallow if you remember where it was placed. 
Information wants to be free but, you can make lots of money if that infomation is not freely known. ['its' replaced for clarity]
*Stockmarket game is played by large numbers of people, any information widely known is adjusted for by the market. Widely held information is valueless in terms of market advantage: having foreknowledge of market movements is often times lucherative. Outrangeously so if its the right information is held  closely enough. Think dotcom bubble economy. Timing is important. Information will expire in terms of market advantage.
 
The game is rigged towards those with connections.
*  Do you think this statement is (npov)?
The laws against insider trading are lip service paid to honesty.
*Its all about the transparency. Many folks at Enron made out like bandits   trading in stock that they knew was worthless (cause they were the ones running  the scam). If the information will cause a share price rise, laws are vitually uninforceable as resonable doubt can be manufactured in any rising price before the trades are made. Falling markets are trickier: if Martha had only sold half her stake, she would have a pretty good defence against charges of insider trading because she  'reduced her exposer to bad news while still maintaining a postion'. A pretty reasonable story of astute finacial judgement don't you  think.  Remember Martha already knew the bad news: its just harder to disguise insider trading if share prices are going to plummet.And she was greedy. Who knows why she did what she did?
This arguement against ineffective laws surrounding insider trading is a variation on a theme by Paine: If the laws are full of loopholes, we are doubly cursed because not only do we suffer the crime that we legislated against; but, we suffer an expensive, intrusive, regulation and we do it by our own hand.     
 
   
I'm suprised "Information wants to be free.." didn't send the cliche alarms ringing. If you're not familiar with phrase, you have just recieved  a common, frequently mutatingmeme.
Now that I'm here and been insulted. I think I might read the article;-)
Two16
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Moved pov material from the main article:
:Perhaps the most common moral argument for condemning at least some kinds of insider trading is that the practice is unfair, especially to outsiders without privileged information. Rarely, however, is it clarified what sort of fairness is involved. Rarely is it noted that alternative conceptions of fairness might produce different views on insider trading. Restrictions on insider trader must necessarily restrict certain people's rights, which might be perceived as unfair by those who find individual rights of prime importance. Rarely is the level of unfairness involved here compared to other kinds of unfairness that might be said to exist in the stock market, especially for those who don't have the resources to participate.
:Some arguments for prohibitions on insider trading argue that they make the market more "efficient" in one way or another. ...
If it goes back in, the criticisms should reflect the specific kinds of insider trading that are illegal, because not all kinds of insider trading are illegal.  Also, there should be no insinuation that the SEC has not given thought when making some kinds of it illegal.  Stephen C. Carlson
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I'm glad Stephen removed my POVful rant. The follow up on the NPOV efforts, I'm wondering if the following isn't POVful:
:Illegal inside trading occurs when the insider violates a fiduciary duty? or other relationship of trust and confidence in the process. Thus, some insider trading is legal and other is illegal, depending on whether there is a breach of trust.
Are "fiduciary duty", "trust", and "confidence" all technical legal terms? If so, this may be a NPOV statement, although the technical nature of the terms should be clarified, and a summary of what these terms mean in Average Joe's English should be provided.
:I'd have to look all of my notes on the topic up, but yes fiduciary duty, confidence, and trust are all legal terms.  Basically, a "fiduciary duty" is the duty that the law imposes imposes on all officers and directors of a company to act in the best interests of the company.  There are two types of fiduciary duty: the duty of loyalty and the duty of due case.  Of these duties, insider trading is concerned with the duty of loyalty.  Note that his fiduciary duty does not apply to all employees of the company.  The issues of breach of trust also apply to the attorneys, accountants, assistants, and other people the officers hire who have been entrusted with confidential information.  Stephen C. Carlson
If these are not meant as technical legal terms, then this seems to imply that the SEC is omniscient and omnibenevolent in deciding what trades to make illegal. Among other things, it implies that it is clear as day how much trust in "the process" is required, whose trust must be ensured, how this is to be accomplished, what "the process" is to accomplish, who is supposed to benefit, etc.. --Ryguasu
:Neither the SEC nor any other govt. agency is omniscient and omnibenevolent -- that's why there is a right to a jury trial.  "In the process" is nothing mysterious just my terminology for "by virtue of the insider trading" without getting too repetitive.  Stephen C. Carlson
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Information wants to be free
:I'm not sure if this is what the author meant, but this could be a reference to the theory of rational expectations, which says that (at least in securities markets) the prices will converge to the same limit as if all traders had access to all information.  To put it simply, if you have inside information, you cannot benefit from it without partially revealing it, because others can observe how you trade. CyborgTosser 20:28, 26 Aug 2004 (UTC)
thread_title:  Archived Discussion 

message: The SEC Insider Trading article should provide you with some insight. Rbcwa 01:33, 10 February 2006 (UTC)
thread_title:  what are the regulation related to insider trading 

message: Note: I removed this secction because, as written, it's more confusing than it is useful, IMO.  It seems like it contains an interesting point (executives often don't acquire their stock on the open market) so if somebody can figure out how to reintegrate it that would be good. --Robert Merkel 00:47, 8 Feb 2005 (UTC)
thread_title:  "Ratios" section removeal... 

message: I would like to remove this paragraph: 
:Advocates of legalization sometimes also make free speech arguments. Imprisoning someone for telling someone else about a development pertinent to the next day's likely stock moves would seem, prima facie, to be a punishment of prohibited speech, i.e. an act of censorship. 
It doesn't make sense. Insider trading as I understand it is the act of making deals based on privileged information, not on disseminating the information itself. I would have just ripped out this text, but do these "advocates of legalization" really make such an argument? If they do, then the text should remain, and I will add a sentence explaining that it doesn't make sense anyway. Jeeves 13:26, 21 Apr 2005 (UTC)
replies: text: Actually, the SEC does prohibited disseminating the information in some cases. And, free speech arguments are made. Here is a source:   Among other things, it talks about a case involving "Dirks" where a broker was punished for telling his clients nonpublic information so they could get out of their position and not lose money.RJII 18:17, 21 Apr 2005 (UTC)
replies: text: Insider dealing = acting on non-public info. What you are talking about is Professional Secrecy. This should be interpretted exactly the same as is the case for lawyers and doctors. The only difference is that these two, popularly known for their professional secret, are not required by law to devulge the information even under court order. └ VodkaJazz / talk ┐ 12:37, 16 May 2006 (UTC)
thread_title: Bizarre argument

message: "Insider trading is usually performed by the already wealthy..." ? RJII 20:47, 15 November 2005 (UTC)
replies: text: I would have thought it was pretty self-evident, actually.  To get prosecuted for insider trading, you're generally either a stockbroker, a senior manager, or a director of a company.  The most recent Australian example of somebody accused of illegal insider trading was  Steve Vizard (he did a deal to avoid prosecution).  In any case, to make any real money from insider trading you need access to a fair whack of capital - you might make substantial profit margins, but the ROI isn't as high as, say, robbing a bank with a shotgun and balaclava. --Robert Merkel 11:57, 17 November 2005 (UTC)
replies: text: I wouldn't consider your average stockbroker as "wealthy." And besides stockbrokers I'm sure a lot of insider trading goes on among professional traders --I know most of them aren't wealthy either. Also, sure you need "access" to a decent amount of capital to make a substantial profit, but you don't need to be wealthy to have access to that. Check out some of the proprietary trading firms --the trader gets anywhere from 10/1 to 25/1 leverage. Put in 10K and you have access to 250K of buying power. Buy and hold on inside information of an upcoming buyout and, if the tip you've been told is good you've made a small fortune. I'm dubious about the claim that most insider trading is done by the already wealthy --I would think most of it would be done by those of more modest means. Now, as far as prosecutions go, it's possible they only go for the wealthier people but I'd have to see evidence of that as well --I have seen cases made against small-time stockbrokers as well. RJII 13:19, 17 November 2005 (UTC)
thread_title: any source for this?

message: POV material moved from main article:
:"(an obvious drawback of trial by jury)"
This is an editorial, and a debatable one at that. One of the biggest benefits of trial by jury, at least in theory, is that randomly selected jurors have a hard time understanding, and therefore convicting under, arcane and confusing laws. This is, again at least in theory, one of the factors that ensure that laws are at least somewhat understandable by the public, or at the very minimum, that incomprehensible laws are difficult to enforce. This would be an example of exactly this happening.
Calion 02:16, 7 December 2005 (UTC)
thread_title:  Trial by jury 

message: :"Martha Stewart: Living Went to jail for insider trading."
It's important to note that Martha Stewart did NOT go to jail for insider trading, but for lying to a federal agent.
Calion 02:16, 7 December 2005 (UTC)
replies: text: Right. And her case may even be too tangential from insider trading to even mention. RJII 04:06, 7 December 2005 (UTC)
replies: text: i remember reading somewhere that the main reason she wasn't tried for insider trading is that the prosecution didn't think an average jury would be able to understand the details. i have no source for this other than my memory though. --dan 23:30, 23 September 2006 (UTC)
thread_title:  Martha Stewart 

message: The current article seems to have a limited amount of information on legitimate insider trading.  Does anyone have a problem with me contributing more information on legal insider trading?
Rbcwa 01:22, 10 February 2006 (UTC)
replies: text: Go for it. RJII 04:34, 10 February 2006 (UTC)
thread_title:  Legal Insider Trading 

message: Anyone know what the FEA is.  It is referred to in the Trading by "insiders" of a corporation section. Rbcwa 01:32, 14 February 2006 (UTC)
thread_title:  What is the FEA 

message: I found the intro as formally written in serious need of improvement. The term "insider trading" should have been bolded as per Wikipedia style guidelines. Since the term is largely used to refer to the illegal practice i felt it should be made clearer that this is how the term is most often used these days. It didn't feel that the use of bullet points to describe the separate uses of the term for legal and illegal practices was the best way to convey the info in this case and thus incorporated the different definitions into the intro paragraph instead. --Cab88 11:12, 21 February 2006 (UTC)
thread_title:  Intro improvements 

message: More than half of this article seems to be very impassioned arguments for making insider trading legal.  Subtract the passion please (its POV).  I think the law deserves to be explained in full.  There are many cases that could be mentioned, and the court's theories as well as your own private (insider) ones.Smallbones
:: That is because there really are few arguments in favour of insider trading laws.  The section does not provide a cogent exposition of the arguments against, but it is difficult to provide POV when there really is little by way of an opposition argument other than various a priori arguments (such as certainty; a specious argument at that) and a perverse attempt to apply morality to markets with bizarre conclusions as to what constitutes 'fair' (e.g. all participants have equal information is 'fair' versus all participants are unfettered and free to buy and sell information as a commodity, like any other, albeit with different costs) 144.135.253.137 06:48, 31 March 2006 (UTC)
replies: text: Despite the "few arguments" in favor of insider trading laws, every significant financial market in the world now outlaws the practice, if for no other reason than the practical: markets that prohibit insider trading perform much better than markets that don't.  There has been a considerable amount of economic and legal research (e.g., La Porta, Schliefer, et al.) showing that companies listed in countries with strong anti-insider trading laws are able to access capital at considerably lower cost than companies listed in countries with lax insider trading laws.  (70.92.247.123 03:51, 4 April 2006 (UTC)
thread_title:  This needs a lot of improvement 

message: The last 2 edits where essentially - this needs to be taken out - no, this needs to be left in.  This logic will just lead to a lame edit war. let's avoid this.
As in the comment above, I think this article needs a lot of improvement.  Much of it is written from a point of view of "let's remove these silly laws!"
First let's divide up things into two sections 1. why the laws are there and how they are justified and 2. criticisms of the law.  I do think that part 2 should address why they don't think insider trading is fraud, i.e. misapropriation of corporate property (information).  If we can get 2 reaonable sections like this, then maybe a good summary may be possible putting together both parts.  Smallbones 14:57, 8 March 2006 (UTC)
thread_title:  Avoiding edit war 

message: We should probably think about adding something about stock option back dating.  It's a very news worthy thing in the investors press.
Rbcwa 02:38, 30 May 2006 (UTC)
replies: text: The question is whether it's insider trading or not.  Legally, it's not as I understand it, but it seems parallel in its causes and might result in some insider trading later.  But is this stretching things too far?  Smallbones 07:37, 30 May 2006 (UTC)
replies: text: There was an article on the FT about it a couple of days ago. It goes more with the Corporate scandals article though. └ VodkaJazz / talk ┐ 16:43, 1 June 2006 (UTC)
thread_title:  Stock Option Back Dating 

message: Although it's true that there are a few economists who take issue with insider trading laws, at the end of the day the debate is not particularly high-profile, nor are insider trading laws particularly controversal in the larger field of economics or within society as a whole.  Two or three paragraphs noting that there are some people who dispute the need for insider trading laws with a sentence or two summarizing the gist of their argument would be sufficent.  This is an encyclopedia article, not an economics journal; we aren't supposed to present the entire debate here. --Aquillion 01:41, 28 June 2006 (UTC)
replies: text: I think most of the editors of this page agree, but a few vigorously disagree.  I'll just ask them to keep it short, avoid repetition, and do please at least address the arguements of the majority view that this is against the law, a violation of fiduciary duty, theft of corporate property, etc.  Smallbones 20:10, 28 June 2006 (UTC)
replies: text: Well, articles can change over time.  Nobody seems to have objected to my suggestion, so if nobody objects in the next few days I guess I'll go ahead and start cutting. --Aquillion 16:58, 10 July 2006 (UTC)
replies: text: Please go ahead, maybe I'll start a little bit.  Smallbones 17:20, 10 July 2006 (UTC)
replies: text: I think it's about half its original size.  Comments, additions, deletions, etc. welcomed.  Smallbones 09:10, 12 July 2006 (UTC)
thread_title:  Arguments section is far, far, far too long