Insider Trading
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Ok I haven’t even looked at the letters next to their names yet but every politician that set in a meeting about coronavirus, dumped stock, and did nothing to warn the public or prepare the government to combat the spread of COVID-19 is just trash. As of now it looks like there are at least 4 senators who set in on a briefing and then pulled big money from the stock market and/or invested heavily in telecom companies.
The dude who told all his donors at his $10.000 A table lunch is maybe the worst offender as he clearly took it seriously In private but not in “public.”
Am I wrong here? Are they just making smart business decisions with their ex theme wealth?
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@benshawks08 read this earlier.
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@benshawks08 it’s bad. I think everyone jumped on Sen. Burr (who isn’t particularly wealthy) too quick. He was talking to the NC State Society, which is for normal folks. I went to the KS Society banquet last year (Self spoke, it was great, the bar ran out too quick though). Also, I’m not opposed to insider trading, in fact I think it should be legalized.
Loeffler is out saying the transactions occurred before the briefing and her assets are managed blind, so we’ll see if that’s true. Johnson just sold equity in his company, which is privately held so that’s fine. So we’re left with Feinstein, Burr, and Inhofe. Burr’s defense was pretty weak, haven’t heard from the others.
BUT! If you know the risk to both blood and treasure and don’t communicate that to the public as a UNITED STATES SENATOR, you ought to really take a look in the mirror and ask yourself if you really have your constituents’ best interests at heart.
So I guess my position is I don’t care about the stocks, but the lack of communication about the real risk is really, really bad.
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@FarmerJayhawk $10,000 a table doesn’t seem like “normal folks” to me. But maybe that’s just me. I’m interested to know more about why you think insider trading should be legal. Specifically in a situation like this where politicians are getting access to possibly classified information (certainly no available to normal folks). You believe they should be able to profit on info like that? Just curious why?
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@benshawks08 said in Insider Trading:
@FarmerJayhawk $10,000 a table doesn’t seem like “normal folks” to me. But maybe that’s just me. I’m interested to know more about why you think insider trading should be legal. Specifically in a situation like this where politicians are getting access to possibly classified information (certainly no available to normal folks). You believe they should be able to profit on info like that? Just curious why?
That figure is for the big donors who book the venue (the Capitol Hill Club ain’t cheap), and pay for the food and drink. Normal folks just buy tickets and go. It’s a good way for all the Congressional delegation’s staffs to connect and reminisce about home.
On insider trading, a couple reasons. First, I’m reflexively against criminalizing activity with no victim. Second, insider trading makes the market more efficient. The stock market is just an aggregation of expectations about a company. If people have solid information about that figure, shouldn’t it be priced in? Third, it’s incredibly hard to prosecute because defining inside knowledge is a very fuzzy line. If you went out and really studied a company and got non-public information (say you hired a bunch of people to count how many customers came into a Walmart) that’s not insider trading even though you acquired information not available to the public. But if the Walton’s texted you to sell since their sales were weak (same information) you could not trade based on that. So we’re saying the same, non-public information is sometimes legal, sometimes not. Some studies show that about 1/4 of all M&A deals have some level of insider dealing. I’m fine with that (yay profits!) and nobody really gets screwed, so if we legalize it it’s one less victimless crime on the books and probably makes the market run more efficiently.
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The most obvious shit ever. No one truly responsible will face justice btw.
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@FarmerJayhawk For me the example you gave is exactly why I think insider trading is bad. The example with counting shoppers at Walmart could technically be done by anyone with the creativity and drive to do so while getting a text from the waltons is totally based on power and connections. Just in my gut one feels like working for an advantage where the other doesn’t.
Personally, I’m against giving people who already are privileged with so many advantages over normal folks even greater advantages. But that’s my bleeding heart lefty liberal that drove HEM mad. I recognize that the world and life are inherently unfair but that doesn’t mean we can’t create rules to try and make it at least a little more fair.
It’s like golf restricting club makers to build new clubs within a certain tolerance. If they didn’t regulate materials, constructions, and tolerances, the game would be completely different and likely not be able to exist anymore as balls would go further and further requiring courses to get longer and longer in a game that already has an environmental sustainability problem.
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@benshawks08 said in Insider Trading:
@FarmerJayhawk For me the example you gave is exactly why I think insider trading is bad. The example with counting shoppers at Walmart could technically be done by anyone with the creativity and drive to do so while getting a text from the waltons is totally based on power and connections. Just in my gut one feels like working for an advantage where the other doesn’t.
Personally, I’m against giving people who already are privileged with so many advantages over normal folks even greater advantages. But that’s my bleeding heart lefty liberal that drove HEM mad. I recognize that the world and life are inherently unfair but that doesn’t mean we can’t create rules to try and make it at least a little more fair.
It’s like golf restricting club makers to build new clubs within a certain tolerance. If they didn’t regulate materials, constructions, and tolerances, the game would be completely different and likely not be able to exist anymore as balls would go further and further requiring courses to get longer and longer in a game that already has an environmental sustainability problem.
Right, there’s just no victim like in the golf example. If anything, the externalities are positive. So I’d rather the SEC go after real crimes and not spin its wheels on these cases that are really hard to prosecute because there’s nobody that can really say they got screwed.
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I would say the public is the victim much like the environment in my example. It’s a big victim that is difficult to attribute acute damage but the overall damage over time is apparent. Insider trading leads to more inequity as it allows the rich and powerful to mitigate losses and get in early on gains that normal folks can’t. And while there will always be inequity, once it gets to a certain point it becomes unsustainable.
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@benshawks08 said in Insider Trading:
I would say the public is the victim much like the environment in my example. It’s a big victim that is difficult to attribute acute damage but the overall damage over time is apparent. Insider trading leads to more inequity as it allows the rich and powerful to mitigate losses and get in early on gains that normal folks can’t. And while there will always be inequity, once it gets to a certain point it becomes unsustainable.
I’m not sure that’s the case at all. Information asymmetries are some of the most severe market failures (see Akerlof’s Market for Lemons) and criminalizing acting on information reduces the amount of information in the market and distorts the value of securities. If big mutual funds are allowed to trade based on insider information, that’s a good thing; your average investor doesn’t day trade the market, they do the smart thing and get into mutual funds. If these fund managers can trade off ALL the information available, not just what you can get publicly, investors are better off. If a small investor isn’t wise enough to invest in products that actually work, I see no role for the SEC in protecting them. Again, my list of things people shouldn’t be allowed to do with their own money is VERY short.
If, for example, the folks at Enron who knew the company was cratering all sold, the market would’ve sniffed out the fraud a lot sooner. Government is just too slow to keep up most of the time. It would also incentivize firms to push out more news to investors, given the law won’t protect their clean or dirty laundry anymore. It will get out eventually and people will act (since it’s legal).
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@FarmerJayhawk Ok admittedly I’m a bit of a finance dullard but if someone is selling stocks they know are about to drop isn’t the victim whoever buys it? If that buyer is another mutual fund, aren’t all the investors in that fund hurt? If it’s just an individual, isn’t that individual now less likely to invest in the future and doesn’t that cause the public to lose faith in the “fairness” of the overall market as a whole?
And o get that the whole idea of the stock market is trying to invest in stocks you think will do well and sell ones you think might drop. But I guess I’m more afraid of corporate greed than I am of regulation. That seems to be the big crux of it right? I know specifically in this instance with the senators we have examples of the failings of government certainly working to invalidate my own point.
Side note: it is very refreshing to disagree with and question someone and for the dialogue to stay friendly and informative.
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@benshawks08 said in Insider Trading:
@FarmerJayhawk Ok admittedly I’m a bit of a finance dullard but if someone is selling stocks they know are about to drop isn’t the victim whoever buys it? If that buyer is another mutual fund, aren’t all the investors in that fund hurt? If it’s just an individual, isn’t that individual now less likely to invest in the future and doesn’t that cause the public to lose faith in the “fairness” of the overall market as a whole?
And o get that the whole idea of the stock market is trying to invest in stocks you think will do well and sell ones you think might drop. But I guess I’m more afraid of corporate greed than I am of regulation. That seems to be the big crux of it right? I know specifically in this instance with the senators we have examples of the failings of government certainly working to invalidate my own point.
Side note: it is very refreshing to disagree with and question someone and for the dialogue to stay friendly and informative.
Right! This is why we need more information out there, not less. With inside information, the incentive becomes to share more widely. Fund managers that acquire said information become more in demand, and eventually it becomes an industry standard. Or, if a CEO knows his firm is going to tank in a year, she should be able to dump the stock immediately and signal the market the stock is going bad. Instead, she has to hold the stock and wait for it to tank or resign, then sell off if the plan is to calm the market. Any firm that uses insider information against its customers won’t last long. For example, Goldman Sachs prohibits all its employees from trading individual stocks to give customers certainty they aren’t getting sold a bag of goods. To my knowledge, Japan, India, and Hong Kong either allow insider trading or really don’t enforce a ban and have very liquid markets with high volume, so maybe it doesn’t? But it’s also hard to know the counterfactual about what would happen if they outlawed it with serious penalties. My guess is prices would change over the long run and become less accurate valuations of each stock, but ¯_(ツ)_/¯
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@FarmerJayhawk But why would there be incentive for someone to share inside information? Doesn’t the value of that information decrease the more people who know it? I’m confused what you think I got right! Your ceo example just gives me even more reservations because again the person at the top with the most power, influence, and information about a company has an advantage over say a worker who is invested in their own company. If the ceo starts selling doesn’t that devalue the stock for the worker down the chain who has shares? And if the ceo were to share that information widely, who would buy the stock she’s trying to unload?
I am really trying to understand this and am doing some extra reading on the google machine but I still end up thinking insider trading is bad and what these politicians did especially so. Didn’t their actions lead to the increase in market volatility? Again. I am an English major reading articles on twitter and the rest of the internet for my information so I could be off here. (I did win my class stock market game in 5th grade…)
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@benshawks08 said in Insider Trading:
@FarmerJayhawk But why would there be incentive for someone to share inside information? Doesn’t the value of that information decrease the more people who know it? I’m confused what you think I got right! Your ceo example just gives me even more reservations because again the person at the top with the most power, influence, and information about a company has an advantage over say a worker who is invested in their own company. If the ceo starts selling doesn’t that devalue the stock for the worker down the chain who has shares? And if the ceo were to share that information widely, who would buy the stock she’s trying to unload?
I am really trying to understand this and am doing some extra reading on the google machine but I still end up thinking insider trading is bad and what these politicians did especially so. Didn’t their actions lead to the increase in market volatility? Again. I am an English major reading articles on twitter and the rest of the internet for my information so I could be off here. (I did win my class stock market game in 5th grade…)
You’re good! I’m enjoying the conversation. I think you’re asking the right questions, which is in some ways more important that getting the right answers.
My point with the CEO scenario was basically a decision: would you rather the CEO be forthcoming and dump the stock or hang onto it, maintain everything is fine, then have the thing crater all the sudden? The overarching point is more information is good. The idea is nobody would buy the stock since the company is failing, so the market is accomplishing its purpose, which is to value companies accurately and trade those values on an open market where you and I can participate.
Re: the politicians, the volume they sold off probably didn’t do much to the market. If they would’ve done their civic duty and communicated the right amount of risk, the market would’ve reacted and people could’ve moved before the circuit breakers went off. I think only Burr is on the hook. Loeffler, Inhofe, DiFi, and Johnson have solid reasons they showed up. The former 3 have their assets in blind trusts and Johnson sold equity in his privately held firm, which would’ve taken months, if not years, to complete.
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Your CEO scenario is an argument for corporate inside information to be disclosed more publicly and sooner than it is now so all shareholders have equal opportunity to make decisions. The idea that a CEO selling their shares gives everyone information doesn’t really hold water since there is a lag in the reporting and anyone seeing the report has no idea why the CEO sold a bunch (college tuition due?).
It is highly inefficient economically to depend on shareholders guessing about insider trading as a means of detecting crucial corporate info. When I was at the CFTC, we often worked with the SEC on these things. Reporting disclosures sometimes alerted our regulators to the need for an investigation. But even with govt investigative power it took a long time to determine why a transaction occurred. Not much use to investors because a sale, or buy, could even be planned far in advance under a contract, ot triggered by economic indicators.
You are correct: insider trading is perfectly legal provided it is done properly. We want corporations to be run by people who have a stake. But the rules against using inside information are designed to avoid letting the insiders be the first in line which leads to distrust of market pricing.
As to all public officials, I would prohibit all market activity except for blind investments in mutual funds. These trades were legal until 2014. One of these guys was one of the 2 senators who voted against the law then.
But in my mind, this may not even count as inside info. There were many sources telling us that this was going to spread, and anyone with an ounce of realism knew the markets would tank. The fact that they got a secret briefing sure didn’t seem to motivate any pushback against the Admin’s rosy posturing.
Nice discussion, by the way. Reminds me of dinner discussions on theoretical stuff that would go on for hours in Law School.
Afterthought: If trading on insider information is victimless, then how far would that extend? Let’s say the CEO, the board, all the officers, and all their relatives own half the shares, and by dumping in concert take virtually all the equity out within a couple of minutes and leave the stock in a company frozen by the NYSE–no victims among the remaining 50% of shareholders?
