Should Insider Trading Be Legal?(cato.org)
cato.org
Should Insider Trading Be Legal?
https://www.cato.org/blog/should-insider-trading-be-legal
42 comments
"Should polluting the rivers be legal?" asks the Industrial Processors Federation
"Should bribing politicians be legal?" asks the League of Responsible Lobbyists
"Should bribing politicians be legal?" asks the League of Responsible Lobbyists
This pits those in favor of maximizing the size of the pie (most everyone) against those who would rather shrink it and maximize the size of their slice (Harley riders, the he-who-must-not-be-named politician, cannibals, insider trading proponents.)
The stock market was one of the most economically efficient inventions in history. It massively grew the size of the pie. Nothing made it more stable and efficient than the banning of insider trading. Removing the ban would turn it into a cesspool of cheating that would make yesterday's meme stocks look like treasuries by comparison.
But that would be just fine with the would-be cheaters. They view it like the ban on Harleys by your HOA. If they could just ride their Harley around your cul-de-sac all night, they could buy your house for a song when you move out. It would increase the size of their slice, so it makes total sense to them.
The stock market was one of the most economically efficient inventions in history. It massively grew the size of the pie. Nothing made it more stable and efficient than the banning of insider trading. Removing the ban would turn it into a cesspool of cheating that would make yesterday's meme stocks look like treasuries by comparison.
But that would be just fine with the would-be cheaters. They view it like the ban on Harleys by your HOA. If they could just ride their Harley around your cul-de-sac all night, they could buy your house for a song when you move out. It would increase the size of their slice, so it makes total sense to them.
It's not just about the potential effects on the stock market.
Allowing insider trading would also incentivize leaders to make business decisions that primarily serve their personal interests, rather than their company's. They would prioritize decisions that create short-term changes in the company’s stock price, just so they can profit from trading on that information.
Allowing insider trading would also incentivize leaders to make business decisions that primarily serve their personal interests, rather than their company's. They would prioritize decisions that create short-term changes in the company’s stock price, just so they can profit from trading on that information.
In our libertarian utopia every employee at every company would receive a complex set of financial derivatives to incentivize them to manipulate the stock in exactly the way we want. Will Bob from Accounts push out recognising some revenue from this Quarter so that we miss projections and he can profit off some short dated Puts? No, because we had our HR team string together a series of quarterly short strangles to incentivize him to stabilize our share price.
> While most countries have strong protections against insider trading, historical evidence suggests that efficient economies do not need such regulations
What historical evidence are they looking at?
https://en.wikipedia.org/wiki/Pecora_Commission https://en.wikipedia.org/wiki/Albert_H._Wiggin
On a tangent, I really loath Cato's hand-wavy libertarian claims pieced together with weak arguments in their writing pieces.
What historical evidence are they looking at?
https://en.wikipedia.org/wiki/Pecora_Commission https://en.wikipedia.org/wiki/Albert_H._Wiggin
On a tangent, I really loath Cato's hand-wavy libertarian claims pieced together with weak arguments in their writing pieces.
> I really loath Cato's hand-wavy libertarian claims pieced together with weak arguments in their writing pieces.
There's very few actual libertarian voices anymore, so I think just for sparking conversation it's good. Whether you are left or right, or even western or eastern, conservative or liberal, in 2024 there is basically agreement that government needs to fix things and government should have more control. Bureaucracy is increasing everywhere. Everyone is doing deficit spending.
There's almost no one mainstream that is actually advocating for less government. Dems in the US might accuse the republicans of wanting less, but I find it hard to find evidence republicans have done any reduction in government since Reagan, and even he did quite little.
There's very few actual libertarian voices anymore, so I think just for sparking conversation it's good. Whether you are left or right, or even western or eastern, conservative or liberal, in 2024 there is basically agreement that government needs to fix things and government should have more control. Bureaucracy is increasing everywhere. Everyone is doing deficit spending.
There's almost no one mainstream that is actually advocating for less government. Dems in the US might accuse the republicans of wanting less, but I find it hard to find evidence republicans have done any reduction in government since Reagan, and even he did quite little.
Cato-style libertarianism (massive deregulation, fire the federal government, increases in corporate power) is a core principle of the GOP's Vice Presidential candidate. Trump has further discussed the possibility of mass firings of the federal bureaucracy. Is that not mainstream?
We don't need further advocates for bad policy just for the sake of it.
We don't need further advocates for bad policy just for the sake of it.
For me it wasn't so much about libertarian claims but about Cato's style of writing. Their written discourse is so lazy and highly disingenuous to the point it becomes offensive.
There are parts where I think libertarianism makes sense but financial control isn't one of them.
> in 2024 there is basically agreement that government needs to fix things and government should have more control.
Agreed. I think there needs to be a better control of who controls the government though.
There are parts where I think libertarianism makes sense but financial control isn't one of them.
> in 2024 there is basically agreement that government needs to fix things and government should have more control.
Agreed. I think there needs to be a better control of who controls the government though.
> On a tangent, I really loath Cato's hand-wavy libertarian claims pieced together with weak arguments in their writing pieces.
It's propaganda. They're compelled to push libertarianism with the strongest arguments they can muster. The problem is society has figured out many areas where libertarianism had serious problems, so the strongest arguments are necessarily weak and misleading.
It's propaganda. They're compelled to push libertarianism with the strongest arguments they can muster. The problem is society has figured out many areas where libertarianism had serious problems, so the strongest arguments are necessarily weak and misleading.
Cato are a rent-a-wonk shop. This feels like someone wants this floated with an eye to a Trump presidency.
As I understand it, fiduciary duty is a key requirement for insider trading to be considered illegal.
Insider trading law requires people with fiduciary duty to report trading, and largely allows any trading after earnings. In particular, with the view that all relevant information on the company was made public recently (if that's not the case, it's the company that would get in trouble). So insider trading is largely legal.
Also, the HK market being above the median by itself doesn't show that it's a good idea. Efficiency was defined as the relative spread in the paper. The efficiency of the HK market might be driven by other factors, like deeper adoption of technology. A better (but still not great) test would be what happened after HK made insider trading illegal.
Insider trading law requires people with fiduciary duty to report trading, and largely allows any trading after earnings. In particular, with the view that all relevant information on the company was made public recently (if that's not the case, it's the company that would get in trouble). So insider trading is largely legal.
Also, the HK market being above the median by itself doesn't show that it's a good idea. Efficiency was defined as the relative spread in the paper. The efficiency of the HK market might be driven by other factors, like deeper adoption of technology. A better (but still not great) test would be what happened after HK made insider trading illegal.
You understand incorrectly. At least, fiduciary duty is absolutely not required to establish insider trading in the UK
market abuse regime (or the EU which is similar). In the UK, simply trading on the basis of material non-public price-sensitive information is insider trading.
In the US there have been some cases which make it very hard to actually be convicted of insider trading in actual practise, but fiduciaries are not the only insiders in US securities law. Here's more details. https://www.investopedia.com/terms/i/insidertrading.asp
In the US there have been some cases which make it very hard to actually be convicted of insider trading in actual practise, but fiduciaries are not the only insiders in US securities law. Here's more details. https://www.investopedia.com/terms/i/insidertrading.asp
IMO, when it comes to market regulation, questions of the type "Should X be legal?" should be answered by yes if and only if it benefits the economy in general.
Insider trading does not, neither do stock buybacks and a few other things I'd like to be made illegal again.
Insider trading does not, neither do stock buybacks and a few other things I'd like to be made illegal again.
Suppose a first company could not buy back its own stock. Hypothetically outlawed.
Well, then a second company could be formed for the purpose of buying shares of the first.
The first company could buy shares in the second. The first company has now bought back its own stock indirectly.
So, there's no point to banning buybacks. If they are economical but somehow banned, they will be emulated.
Buybacks are usually economical as a way to return dollars to stockholders without incurring the immediate taxation that dividends do. Want fewer buybacks? Lower taxes on dividends. Nothing else will reduce them or, as shown above, their emulation in the face of onerous laws.
Well, then a second company could be formed for the purpose of buying shares of the first.
The first company could buy shares in the second. The first company has now bought back its own stock indirectly.
So, there's no point to banning buybacks. If they are economical but somehow banned, they will be emulated.
Buybacks are usually economical as a way to return dollars to stockholders without incurring the immediate taxation that dividends do. Want fewer buybacks? Lower taxes on dividends. Nothing else will reduce them or, as shown above, their emulation in the face of onerous laws.
The point of banning stock buybacks is to prevent companies from destroying themselves by giving everything to shareholders instead of investing, hiring, etc. Lowering taxes on dividends defeats the purpose of a potential ban on buybacks.
Dividends were meant to be the only, regulated, mechanism through which a company can directly reward shareholders. I believe a proper law that bans stock buybacks and other similar schemes of redistribution to shareholders would be beneficial to the economy, and even to the shareholders themselves in the long term.
I also believe such a law could be enforced with enough political will. It's just a matter of having an agency monitor stock movement, imposing hefty fines to offenders...
Dividends were meant to be the only, regulated, mechanism through which a company can directly reward shareholders. I believe a proper law that bans stock buybacks and other similar schemes of redistribution to shareholders would be beneficial to the economy, and even to the shareholders themselves in the long term.
I also believe such a law could be enforced with enough political will. It's just a matter of having an agency monitor stock movement, imposing hefty fines to offenders...
Or put a lot of tax on buybacks and make it illegal to ping-pong them between companies. When it is a good thing for regular people there are so many issues but it is so easy to cheat for wealthy people and companies. Politicians still not even talking about making it illegal for private equity and similar to buy housing property for example which is insane to me as a regular person
Then someone would show this arrangement to a judge who would order the executive who approved it to be placed in prison. Circular ownership is not allowed in many jurisdictions.
IANAL, but https://www.law.cornell.edu/uscode/text/15/80a-20 suggests there are structures that would be permissible.
For example, something like a pooled company that exists to provide this service for dozens of corporations thereby meeting ownership dilution requirements to avoid triggering circular ownership statutes.
Corporate tax lawyers are bright (a well-deserved compliment). Someone would figure out how to hack it. And then the well-intended hypothetical law would just put money into the pockets of lawyers and accountants at the expense of shareholders. It'd sound great on a campaign trail but be stupid in practice.
For example, something like a pooled company that exists to provide this service for dozens of corporations thereby meeting ownership dilution requirements to avoid triggering circular ownership statutes.
Corporate tax lawyers are bright (a well-deserved compliment). Someone would figure out how to hack it. And then the well-intended hypothetical law would just put money into the pockets of lawyers and accountants at the expense of shareholders. It'd sound great on a campaign trail but be stupid in practice.
> Someone would figure out how to hack it.
That's the point of the judge.
That's the point of the judge.
The judge is there to interpret and to apply the law. If there's a hole, there's a hole. And the incentives would be immense to find a legally defensible hole. Think bug bounty on an unfathomable scale.
When the law says "companies can't own themselves, even indirectly, or the CEO goes to jail" the judge will be able to see that company A owning company B which owns company A is indirect self-ownership, and send the CEO to jail. No matter how complicated a scheme the CEO comes up with, the judge can likely see through it.
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I have worked on equities platforms in the US and Europe. I consider both arguments given early in the piece to be convincing defences of insider trading bans.
1. "insider trading argue [..] violates the principle of equal opportunity because actors are trading on information available only to them". This is true - it does undermine the principle of equal opportunity. The argument the author makes later about hedge funds is not relevant to this, because they are building their conclusions from a foundation of public information.
2. "[insider trading] creates inefficiencies by discouraging investment". It does. The equities market only exists because of the combination of the heavy regulation that creates it, and the public that chooses to invest in it. The equities market will only retain public confidence while people have high confidence in the utility value of the system. This is an ongoing project, akin to regularly painting a house to protect the walls. Allowing insider trading would undermine that project, because it would rightfully strengthen the perception that there was one standard for insiders and another for outsiders.
I will present two further arguments.
3. Work related to employment should focus on service to the company. If people are trading on the back of information they access through employment, that creates mixed incentives.
4. Laws around equities trading are structured to service the principle of do-the-right-thing. This includes bans on front-running, rules about not loading up the book to communicate false interest. The ban on insider trading fits naturally into the ethos of the larger set of rules. It would be weird to create an exception for that alone.
The post does give an interesting picture of a world without insider trading.
a. More efficient price-discovery. This is true.
b. Non-government mechanisms where firms prevent insider trading. A firm could build a reputation for being good at this, and distinguish themselves against the market.
The second point is true, but it creates a more complicated market structure, because pricing of equities would need to consider how individual companies enforce the behaviour of their staff. Perhaps this would evolve into an industry standard akin to SOC 2 Type 2. Yuck! It is simpler and more efficient to have the regulator outlaw insider trading.
Most markets emerge organically. Food stalls, shoe shops, commodities, foreign exchange. But this is not true of the equities market.
The equities market as we currently think of it is a product of heavy government regulation, and would not exist without it. There is no such thing as a big equities market without heavy regulation. If you tried to build such a thing, that thing would not win public confidence. If they changed an existing system, liquidity would flow away to other jurisdictions. The importance of public confidence motivated Hong Kong and France [1] to create insider trading bans. The dynamics of insider trading and public confidence are a reason to be dubious about the prospects of some proposals for blockchain-based securities.
:1 see p46/47 https://repository.law.miami.edu/cgi/viewcontent.cgi?article...
1. "insider trading argue [..] violates the principle of equal opportunity because actors are trading on information available only to them". This is true - it does undermine the principle of equal opportunity. The argument the author makes later about hedge funds is not relevant to this, because they are building their conclusions from a foundation of public information.
2. "[insider trading] creates inefficiencies by discouraging investment". It does. The equities market only exists because of the combination of the heavy regulation that creates it, and the public that chooses to invest in it. The equities market will only retain public confidence while people have high confidence in the utility value of the system. This is an ongoing project, akin to regularly painting a house to protect the walls. Allowing insider trading would undermine that project, because it would rightfully strengthen the perception that there was one standard for insiders and another for outsiders.
I will present two further arguments.
3. Work related to employment should focus on service to the company. If people are trading on the back of information they access through employment, that creates mixed incentives.
4. Laws around equities trading are structured to service the principle of do-the-right-thing. This includes bans on front-running, rules about not loading up the book to communicate false interest. The ban on insider trading fits naturally into the ethos of the larger set of rules. It would be weird to create an exception for that alone.
The post does give an interesting picture of a world without insider trading.
a. More efficient price-discovery. This is true.
b. Non-government mechanisms where firms prevent insider trading. A firm could build a reputation for being good at this, and distinguish themselves against the market.
The second point is true, but it creates a more complicated market structure, because pricing of equities would need to consider how individual companies enforce the behaviour of their staff. Perhaps this would evolve into an industry standard akin to SOC 2 Type 2. Yuck! It is simpler and more efficient to have the regulator outlaw insider trading.
Most markets emerge organically. Food stalls, shoe shops, commodities, foreign exchange. But this is not true of the equities market.
The equities market as we currently think of it is a product of heavy government regulation, and would not exist without it. There is no such thing as a big equities market without heavy regulation. If you tried to build such a thing, that thing would not win public confidence. If they changed an existing system, liquidity would flow away to other jurisdictions. The importance of public confidence motivated Hong Kong and France [1] to create insider trading bans. The dynamics of insider trading and public confidence are a reason to be dubious about the prospects of some proposals for blockchain-based securities.
:1 see p46/47 https://repository.law.miami.edu/cgi/viewcontent.cgi?article...
Not for any of the reasons listed in this article
That was weak. The private contracts would go away if insider trading was legal, how dense is this author
I would be for more and faster disclosures of trading by insiders, and advertising/voluntary disclosures of a trades based on MNPI as a safe harbor and signal to the market. Promote price discovery.
That was weak. The private contracts would go away if insider trading was legal, how dense is this author
I would be for more and faster disclosures of trading by insiders, and advertising/voluntary disclosures of a trades based on MNPI as a safe harbor and signal to the market. Promote price discovery.
Indeed, I think it’s obvious the reason the companies train about insider trading and have rules and blackout periods is becuase it’s illegal!
If you allow insider trading by the public, then you have to assume that all trading activity is insider trading and that you are not receiving a fair price on your purchase. It might be more than fair (?) for the seller, but you are not receiving goods at the same price as your competitors.
Fluff like this makes the source look more and more out of touch; at what point does a think tank become it's own version of 'The Onion'?
It is for members of congress apparently.
No, twice.
Dark money influence organisation pushes policy for sole benefit of its funders. Dog bites man. More news at 10.
N. Pelosi entered the chat.
a lot of capitalism is just gambling, and being able to rig the casino so you keep winning doesn't somehow make you a smarter gambler, it doesn't make gambling less wrong, it doesn't make you more deserving because you figured it out. The entire thing is a wash. The people in control of making laws shouldn't be exploiting those laws. What's the point of laws at all, then?
When you step up to a shell game on the street, you are willingly buying from a willing seller. It's illegal because the game is rigged, unregulated, and leads to further crimes.
>Moreover, much “insider” trading is legal, such as hedge funds trading on their own research.
If they do the research with public sources, it's not insider. If they use non-public sources, it's insider.
The biggest loophole is Congress, which has exempted themselves from the prohibition. That's very bad.