Comments on: Is Insider Trading Harmful? http://cafehayek.com/2009/10/is-insider-trading-harmful.html where orders emerge Mon, 16 Jan 2012 02:06:33 +0000 hourly 1 http://wordpress.org/?v= By: Anonymous http://cafehayek.com/2009/10/is-insider-trading-harmful.html/comment-page-1#comment-187252 Anonymous Sat, 24 Oct 2009 12:51:00 +0000 http://cafehayek.com/?p=6949#comment-187252 Notice that no one sues if someone uses so-called "inside information" and loses money! The inside information nugget itself does not determine the price reaction; insiders are forecasting along with the rest of us about the public reaction to the information once it becomes public. This is why the insider trading laws were so difficult to write, and why apparent violations must be tried on a case-by-case basis. I am not defending illegal insider trading. Rather, I just want to point out that there is a very fine line between trades that are and are not legal under this law, and that we only see those instances where the insider gained. I believe there are just as many instances where the insider used the information, only to lose money because the public stock price failed to react as the insider expected. The insider does not control the stock market's reaction to new information. Notice that no one sues if someone uses so-called “inside information” and loses money! The inside information nugget itself does not determine the price reaction; insiders are forecasting along with the rest of us about the public reaction to the information once it becomes public. This is why the insider trading laws were so difficult to write, and why apparent violations must be tried on a case-by-case basis. I am not defending illegal insider trading. Rather, I just want to point out that there is a very fine line between trades that are and are not legal under this law, and that we only see those instances where the insider gained. I believe there are just as many instances where the insider used the information, only to lose money because the public stock price failed to react as the insider expected. The insider does not control the stock market’s reaction to new information.

]]> By: Ken http://cafehayek.com/2009/10/is-insider-trading-harmful.html/comment-page-1#comment-187066 Ken Thu, 22 Oct 2009 16:31:00 +0000 http://cafehayek.com/?p=6949#comment-187066 Isn't it a given that essentially everyone who invests believes himself to have better information, have interpreted it better or acted on it sooner than his competitors? Since everyone believes himself to be investing on such insider information, charges of insider trading are simply an accusation that one had the temerity to be correct in his assessment. Isn’t it a given that essentially everyone who invests believes himself to have better information, have interpreted it better or acted on it sooner than his competitors? Since everyone believes himself to be investing on such insider information, charges of insider trading are simply an accusation that one had the temerity to be correct in his assessment.

]]> By: Methinks http://cafehayek.com/2009/10/is-insider-trading-harmful.html/comment-page-1#comment-187058 Methinks Thu, 22 Oct 2009 13:28:00 +0000 http://cafehayek.com/?p=6949#comment-187058 incidentally, as far as I'm aware, the SEC has never been able to make the case that insider trading is fraud - even though it has tried numerous times. incidentally, as far as I’m aware, the SEC has never been able to make the case that insider trading is fraud – even though it has tried numerous times.

]]> By: Methinks http://cafehayek.com/2009/10/is-insider-trading-harmful.html/comment-page-1#comment-187056 Methinks Thu, 22 Oct 2009 13:26:00 +0000 http://cafehayek.com/?p=6949#comment-187056 Your porsche sale is not analogous to an insider trade. In an insider trade, by trading the insider gives up the information that the car is a lemon. That's the whole point. It's more disclosure, not less. Moreover, people sell shares of stock to each other all the time without insider information. If the stock tanks after the buyer bought it because of some news that had not yet hit the tape when the seller offered it, by your logic the buyer was defrauded. The porsche had a faulty engine, but the seller didn't know. Can the buyer of the stock sue the seller? No. Can buyer of the porsche sue the seller. I think so. Your second scenario....that's not how insider trades work. Insiders enter orders in the open market. Privately calling me does not. But if they did happen the way your describe, I wouldn't trade with you because I am not a moron. What idiot would offer me shares at the closing price when the company is on the cusp of announcing news that would send its stock skyrocketing? Why is he not seeking to profit from this news? Why isn't he trying to buy calls instead or asking me to sell to HIM at the closing price? a half-wit would smell this rat. No trade. And actually, I would probably hang up the phone and short the stock. You inadvertantly gave up the information (that Porsche is bust) even though the words tumbling out of your mouth are saying exactly the opposite. Actions speak louder than words, Gecko. That's why the actions of insiders in the market carry so much information. Your porsche sale is not analogous to an insider trade. In an insider trade, by trading the insider gives up the information that the car is a lemon. That’s the whole point. It’s more disclosure, not less.

Moreover, people sell shares of stock to each other all the time without insider information. If the stock tanks after the buyer bought it because of some news that had not yet hit the tape when the seller offered it, by your logic the buyer was defrauded. The porsche had a faulty engine, but the seller didn’t know. Can the buyer of the stock sue the seller? No. Can buyer of the porsche sue the seller. I think so.

Your second scenario….that’s not how insider trades work. Insiders enter orders in the open market. Privately calling me does not. But if they did happen the way your describe, I wouldn’t trade with you because I am not a moron. What idiot would offer me shares at the closing price when the company is on the cusp of announcing news that would send its stock skyrocketing? Why is he not seeking to profit from this news? Why isn’t he trying to buy calls instead or asking me to sell to HIM at the closing price? a half-wit would smell this rat. No trade. And actually, I would probably hang up the phone and short the stock. You inadvertantly gave up the information (that Porsche is bust) even though the words tumbling out of your mouth are saying exactly the opposite. Actions speak louder than words, Gecko. That’s why the actions of insiders in the market carry so much information.

]]> By: Anonymous http://cafehayek.com/2009/10/is-insider-trading-harmful.html/comment-page-1#comment-187045 Anonymous Thu, 22 Oct 2009 07:08:00 +0000 http://cafehayek.com/?p=6949#comment-187045 Well, I am a Porsche employee and I sell you a 6 month Porsche 911 looking brand new and with a mileage of 2000miles for a price you're willing to pay for that vehicle, but I forget to tell you that the engine is in fact 8 years old and has run about 400.000miles, most of them on our race track- you only find out that two hours later when the engine explodes, and the porsche dealership denies you warranty because the broken parts are all way too old. I guess you will not feel defrauded but instead you will be delighted that a new price discovery has been made available to you by my selling action. I am sure you will not come back to me threatening to taking me to court for selling you something without informing you of the relevant facts. You don't like these kind of laws anyway. If I am the Porsche CFO calling you after market closing informing you that Porsche will announce tomorrow a record profit - twice as much as analysts expect- , and I offer you a small packet of shares at market closing price because I need the cash to meet a margin call in an Asian investment, and I need the money when Tokyo opens. If you accept to buy, you will be delighted when I announce the next day at 2pm the biggest and most unexpected loss in the history of German car making and that Porsche AG is de facto bust. Sure I did not defraud you, I was just informing the market faster than bloomberg can. Well, I am a Porsche employee and I sell you a 6 month Porsche 911 looking brand new and with a mileage of 2000miles for a price you’re willing to pay for that vehicle, but I forget to tell you that the engine is in fact 8 years old and has run about 400.000miles, most of them on our race track- you only find out that two hours later when the engine explodes, and the porsche dealership denies you warranty because the broken parts are all way too old. I guess you will not feel defrauded but instead you will be delighted that a new price discovery has been made available to you by my selling action. I am sure you will not come back to me threatening to taking me to court for selling you something without informing you of the relevant facts. You don’t like these kind of laws anyway. If I am the Porsche CFO calling you after market closing informing you that Porsche will announce tomorrow a record profit – twice as much as analysts expect- , and I offer you a small packet of shares at market closing price because I need the cash to meet a margin call in an Asian investment, and I need the money when Tokyo opens. If you accept to buy, you will be delighted when I announce the next day at 2pm the biggest and most unexpected loss in the history of German car making and that Porsche AG is de facto bust. Sure I did not defraud you, I was just informing the market faster than bloomberg can.

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