[evanpw]

I basically agree with this, but I don't think it helps that much to answer the question of which trading activities should be allowed, and which should send you to prison. Almost all of what you've said applies equally well if you replace "insider trading" with "professional trading".

If you send a 1000 share buy order to the market, knowing that you're going to send 99 more of them throughout the day, you're making money (or at least losing less money) because of information that you have and your counterparties don't. And that kind of trading definitely has a negative effect on liquidity (almost the whole difficulty in market making is preferentially trading against people who aren't doing this). But this splitting of orders is universally viewed as "ok", and is how most large-volume trading is done these days.

The difference between this and insider trading is in who owns the information. Most people view the large-volume trader as doing something okay, because they own the information about their own future trading behavior. Insider trading is illegal not because it's unfair to trade on asymmetric information, but because you're trading on information that was stolen from the company. (This is why Mark Cuban didn't go to prison: a company gave him some insider information, but forgot to ask him not to trade on it; no stealing involved).

From this perspective, it makes sense to prosecute the original tipper, and anyone in the chain who knew (or should have known) that the information was stolen (by analogy to the crime of passing stolen goods), but not the guys at the end who were clueless about the scheme. (Although it might make sense to make them disgorge their trading profits.)

[mrchicity]

The other difference is that inside information isn't available on a reasonable and non-discriminatory basis. Traders pay for advantages all the time: Bloomberg terminals, news services, hire better analysts, pay someone to count cars in store parking lots, purchase faster computers or data feeds, but anyone else can do the same. Some players have an advantage, but the playing field itself is relatively level.

With inside information, it's not available to people outside the tipping network at any price. This, more than the mere chance of getting "picked off" by asymmetric information, drives traders out of the market, making it less liquid. If they were just losing because they didn't have good enough analysts, they could always compete and hire more. For the same reason, regulators and exchanges try to keep manipulators out of the market even if they bring a lot of volume. Eventually people will lose confidence in the market itself and leave.

[losvedir]

> With inside information, it's not available to people outside the tipping network at any price.

But surely this is begging the question? If there were no laws restricting trading wouldn't information that we currently call "inside information" become available at some price? I could easily see some exclusive, high priced news service selling these leaked facts. It would then cause the "true price" of the stock to be found much, much quicker.

[mrchicity]

I don't think exclusive access would be legal, and if access isn't exclusive, the value of the information would drop, as it's only valuable to the extent that it's not known by others.

Also, simply being aware that such a service exists and can release information at certain times would let uninformed traders exit the market during releases. Right now insider traders can arrive randomly at any time.

[thaumasiotes]

> With inside information, it's not available to people outside the tipping network at any price.

Let's take a stylized version of a recent insider-trading case:

- A company ("Conglomacorp") employs someone ("Big Mouth") to dispense inside information to investors. Usually he does this by sitting in his office and answering phone calls. (This is common, and definitely legal.)

- A particular investor ("Shylock") develops a friendship with Big Mouth, and regularly goes to dinner with him. At dinner, Big Mouth tells this investor company information.

- Shylock trades in Conglomacorp stock.

- It's stipulated that if the information that Shylock received had been dispensed during work hours, there wouldn't have been any legal problems. But he is prosecuted on the theory that, since it was dispensed at dinner, outside of work hours, he should have been aware that trading on it was illegitimate.

How does this case fit in with your ideas of insider trading? It's certainly not the case that "[the inside information is] not available to people outside the tipping network at any price". You have to be a big enough investor that the investor relations desk has time for you, but that's open to anyone.

[mrchicity]

Answering calls with individual investors and giving out material information is illegal under Reg FD. Not sure about this particular fact pattern, but being told something officially vs. over dinner/drinks can have a different expectation as far as confidentiality goes. That seems sensible.

Also, FWIW, and I'm sure this wasn't your intent, but "Shylock" is considered an Anti-Semitic slur by many people.

[eru]

Compare http://time.com/3394403/shylock-biden/

[lmm]

"Reasonable and non-discriminatory" is a technical term, and I think it covers this case. If the company accepts everyone's calls, or everyone who owns more than x% of their stock, or charges you $y/minute, it's fine for them to reveal information that way. Revealing information to individuals that Big Mouth personally decides to go to dinner with is not ok.

[thaumasiotes]

Despite the fact that it's the same information? There's no distinction, in the example, between information that it's OK for Big Mouth to disclose and information that he can't disclose. Such forbidden information might exist and be known to Big Mouth, but Shylock didn't receive it. How can the only problem be that it was disclosed outside business hours?

[lmm]

If it happens in business hours then it's Conglomacorp's job to supervise Big Mouth properly and make sure he's not playing favourites (which as your sibling points out would be a Reg FD violation). If Shylock wants to trade on information then he needs to get it through the official channel where it's subject to compliance monitoring and all the rest of it. I'm fine with it being a crime for him to get information from Big Mouth in a way that bypasses those processes even if it turns out those processes wouldn't actually have blocked the information in this case.

[mrchicity]

https://en.wikipedia.org/wiki/Regulation_Fair_Disclosure

[evanpw]

I agree that there are legitimate reasons to restrict insider trading, but I think that the "fairness" angle distorts more than it illuminates. Warren Buffet's trading plans for next year are not available to me at any price, and he can probably be 95% confident that after announcing he owns a stake in some company the price will jump, but I (and probably you) don't think that means he should go to prison.

[mrchicity]

Anyone buying a lot of shares will move the price up. Buffett makes money because he buys shares under their future value despite moving prices in the short-term, not because of it. Anyone can try to become as smart as Buffett, hire away his analysts, and so on.

[evanpw]

> Anyone can try to become as smart as Buffett, hire away his analysts, and so on.

Anyone can try to schmooze corporate insiders so that they tell you some juicy information. And that seems a lot easier (theoretically and empirically) than becoming Warren Buffett.