[bobcostas55]

You completely ignore the benefit of the more accurate price.

Let's say the price of a share with the inside info is 110. It is now 100. The inside trader does cause some volume that wouldn't have happened otherwise, and moves the price to 105 -- to the detriment of someone who would not have traded otherwise. But then every subsequent trade is at a price closer to the true one, a clear benefit.

It is true that greater information asymmetries will decrease liquidity/widen spreads, but is this a sufficient justification for banning inside trading? Also, information asymmetry is a matter of degree, not a binary thing. A skilled fund manager may have assembled public information (the "mosaic" view) that when put together is tantamount to insider info. You could use the exact same argument to ban him from trading.

[lambdapie]

I wouldn't say that I ignored the benefit or a more accurate price, since I explicitly mentioned this benefit twice. But I wasn't clear enough of the implications. To clarify: insider trading has both benefits and costs, and there is no simple argument that shows which is greater. I was primarily addressing people (like in the article I referenced) who say that insider trading is clearly and unambiguously good.

[joe_the_user]

Theft benefits the thief while costing the person stolen from.

If one can backup and use a fuzzy enough lens, one can just ask "how should society calculate the total benefits here" but the problem is this begs the question of whether it's proper for the state to just ask these questions.

My impression is that none of the insider trading proponents are also proponents of the view that it's not theft to take money that falls off the back of an armored car because "it's hard to who it belongs to" and "we might well benefit from this money more than whoever it really belongs to" but their arguments seem the same. Further, the average people finding money on the street probably really do need it more than your average insider trader.

[thaumasiotes]

> Theft benefits the thief while costing the person stolen from.

> If one can backup and use a fuzzy enough lens, one can just ask "how should society calculate the total benefits here" but the problem is this begs the question of whether it's proper for the state to just ask these questions.

But in the case of insider trading, there is no such person. Lambdapie identifies that there is a cost (yes!), but that cost only exists at a fuzzier level than "the person stolen from". Trying to examine at a finer level doesn't make sense.

[wavefunction]

What if you considered the lost "profit" the non-insiders would have made from buying at 100 rather than 105, or 103, or whatever price results from normal speculative activity?

[thaumasiotes]

Can you sketch a more concrete example of what you're talking about?

[Natanael_L]

But there's also bad incentives tied to it - with inside information, you're incentivized to keep others in the dark so that you can maximize the impact of your trades. Things like borrowing money to short stocks in a company likely to go bankrupt, while telling people to buy.

[evanpw]

> with inside information, you're incentivized to keep others in the dark so that you can maximize the impact of your trades

This is true of all professional trading.

> borrowing money to short stocks in a company likely to go bankrupt, while telling people to buy

This would be fraud, which is illegal independently of any insider trading rules

[baddox]

Why does borrowing money in any way diminish the positive effect of making the stock price more reliable?

And how does the incentive to lie to other traders apply only to insider trading? It seems like that would always apply to all trading.

[Natanael_L]

Like I replied to another comment, should judges be allowed to trade on information about judgements he has yet to deliver?

[baddox]

I don't think so, but I think that could be handled on the side of the court, not the side of the exchange. It could certainly be illegal, or at least a disbarrable offense, for a judge to use his or her knowledge for personal gain. Likewise, many of the most flagrant examples of insider trading could be covered under trade secret or contract law, like a CEO shorting his or her company then purposefully sabotaging it.

[giaour]

That sounds like a question for a professional ethics board. I would assume a judge caught doing that would be sacked, disbarred, and publicly shamed, even if everything he did was strictly legal.

"Wrong" doesn't automatically mean "criminal."

[JacobH]

Telling people to buy stock you shorted is a bad idea. You're goal is for the stock to go lower.

[lmm]

Yeah but conversely you want to talk the price up before you lock in your short so that you get in at a better price.

[Natanael_L]

> bankrupt

Should deal with that

[eru]

> Things like borrowing money to short stocks in a company likely to go bankrupt, while telling people to buy.

It's a dick move, but seems perfectly legal.

[joe_the_user]

You completely ignore the benefit of the more accurate price

The gp does a good job of describing how insider trading actually takes money from particular people. Are you saying that a certain number of people should have their money taken in order that prices are closer to predicting otherwise unknown results? Something like "by eminent domain, we are taking your investment profits for the great good of accuracy in stock prices".

Moreover, the other people who benefit from price jumps from invisible sources are those who don't know anything but who are willing to gamble that these price jumps represent a real increase in value. The existence of such gambling would seem like it increases the overall volatility of the market and given that such gamblers would tend to magnify random jumps in the market as well, it seems like society broadly would not experience any benefit.

[beagle3]

The problem is that insiders can actually (and easily, and even subconciously) change that price.

Let's say I believe that the company I work with is horribly mismanaged. I short it. Then, all of a sudden, an announcement comes ("corp X is going to buy our company") that raises the price and makes me lose my pants. I have two choices now:

a) lose my pants, or

b) use the due-diligence period to try to kill the deal from the inside.

Are you willing to hold stock of a company in which (b) is likely to happen? I don't.

Furthermore, even though a 5% discrepancy is already huge, in many cases it is much larger than that: valeant recently dropped 70% in a few weeks, and insiders knew all about the irregularities1; If allowed to short, a new employee, upon discovering those irregularities, has a great incentives to quit, short, and go to the newspaper. While this would deliver justice much more swiftly to the company, it would do so to the benefit of that individual at the expense of everyone else. We disallow vigilante justice in general for good reasons and this is no different.

[JacobH]

Bad argument because you stated the problem. Insider trading is bad because of what you pretty much said. Liquidity is only important when considering how fast you want to buy or sell your stakes in a company.

If an insider knows a stock will yield him 10% profit and has a month of time to buy stocks, even if the daily volume is 500k shares. They can gradually buy shares at 20k/day, and once that news becomes public and the liquidy goes up they can sell off all of their shares in one shot pretty much. And people just just got news of the information would think that their stock has a 10% upside, but since someone already beat them to the 10%, they aren't going to get anything.