Should Insider Trading be legal?

[Russ Smith]

Donald Boudreaux an Economics Professor was just on with Larry Kudlow on CNBC making that exact argument.

His thinking is if I got it, that if insiders were allowed to trade on inside information stocks would trade at more "fair" values. He also said if insider trading were legal, Enron wouldn't have happened.

The idea he says if Enron is at 100 a share and the insiders know there's ongoing fraud and the price is way too high, insiders will either sell or short the stock(or both) causing the price to go down to what its true value should be. That drop in price would alert non insiders that something is wrong at Enron(expose the fraud) and they would "get out of the stock."

The other guy on there said he was ridiculous but he didn't really do a good job of explaining why. In a case such as that first off the odds are that the fraud is being perpetrated by insiders, so the idea that they're going to intentionally expose their own fraud is preposterous.

Furthermore using his idea, what would happen is say insiders know the CEO is going to step down because of a scandal that's not public. So all the insiders sell, the stock tanks, and then all non insiders who were long on the stock lost money. how is that "fair"? How is that making the market more efficient? Yes the price of the stock reached it's new true value quicker, but it did so entirely because insiders were able to get out(presumably at a profit) before the news became public leaving everyone else holding the bag.

 

[conraddobler]

Donald Boudreaux an Economics Professor was just on with Larry Kudlow on CNBC making that exact argument.

His thinking is if I got it, that if insiders were allowed to trade on inside information stocks would trade at more "fair" values. He also said if insider trading were legal, Enron wouldn't have happened.

The idea he says if Enron is at 100 a share and the insiders know there's ongoing fraud and the price is way too high, insiders will either sell or short the stock(or both) causing the price to go down to what its true value should be. That drop in price would alert non insiders that something is wrong at Enron(expose the fraud) and they would "get out of the stock."

The other guy on there said he was ridiculous but he didn't really do a good job of explaining why. In a case such as that first off the odds are that the fraud is being perpetrated by insiders, so the idea that they're going to intentionally expose their own fraud is preposterous.

Furthermore using his idea, what would happen is say insiders know the CEO is going to step down because of a scandal that's not public. So all the insiders sell, the stock tanks, and then all non insiders who were long on the stock lost money. how is that "fair"? How is that making the market more efficient? Yes the price of the stock reached it's new true value quicker, but it did so entirely because insiders were able to get out(presumably at a profit) before the news became public leaving everyone else holding the bag.

Why not just make cheating and stealing legal too while we're at it?

There should be no rules at all, heck if you want to club someone to death to sell your stock before they can then so be it.

Sigh.

Every day is a new absurdity, that's how I know we haven't hit bottom yet.

Fairness, truth, reality, all are concepts that you would think were simply dead.

Again, sigh.

It's illegal for me to play online poker, because that's bad, heck it's illegal to gamble in most states because heck that's bad too.

Your bank though can make massive gambles in the stock market and fail then bill you for losing.

Welcome to our wonderful world of bizzaro ethics.

It's permeated everything, it's everywhere, all of us have turned into scammers extrodinare, or nearly all of us.

My friend was complaining yesterday about how little they make profit wise off a boy scout chili supper.

The other troops in my town sell fireworks, they make a killing doing that, have the boy scout logos on the trailers, have signs that say support the scouts etc but my friend explained that's against the rules.

However these guys have parent group, the parent group actually sells the fireworks, thus they then donate the money to scouts.

Nevermind that the boy scouts explicity say it's against the rules because so many young people are hurt by fireworks.

I'm sure if you give it long enough people will begin to question why we need laws anyhow.

 

[jefftheshark]

It is these constant and random changing of the rules in the middle of the game that make it next to impossible to invest or trade in the market right now.

In the last week, there have been policy changes at the FDIC and at Fannie Mae that should have huge impacts on the values of a lot of different instruments, from T-Bills & CMBS's to bank solvency issues, and yet we all just go on as if nothing has happened. In effect, the government has decided that the only way out of this mess is to lie to everyone about everything.

So I guess that in this environment, why not allow more cheating and obscuring of what is going on, as it is now the patriotic thing to do.

JTS

PS - Rivercard said over at P&R that the forum is becoming the "Doom & Gloom" board.

And I suppose that he's right.

But is so difficult these days to see what is going on, and yet have everyone and everything saying that you are wrong to be feeling that way.

It's somewhat like being in "V".

 

[Gaddabout]

If you allow insider trading, you give room to powerful people who can greater use it to manipulate. It's insanity. There's no going back once you jump off that cliff. You make it legal to be a pirate in Armani suits.

 

[Russ Smith]

If you allow insider trading, you give room to powerful people who can greater use it to manipulate. It's insanity. There's no going back once you jump off that cliff. You make it legal to be a pirate in Armani suits.

Exactly, it's like why organized sports is so terrified of point shaving and betting scandals. The minute the public doubts the game is on the up and up, things go to hell.

Now most people know that investing is not all on a level playing field, but the idea that allowing people with inside knowledge to trade on that knowledge is good for the market is preposterous. It's only good for the insiders since it would allow them to trade when they know it's likely to result in the most gains. There's nothing in that which incentivizes them to act in the best interests of the company and the shareholders, just in the best interests of their brokerage account.

 

[conraddobler]

It is these constant and random changing of the rules in the middle of the game that make it next to impossible to invest or trade in the market right now.

In the last week, there have been policy changes at the FDIC and at Fannie Mae that should have huge impacts on the values of a lot of different instruments, from T-Bills & CMBS's to bank solvency issues, and yet we all just go on as if nothing has happened. In effect, the government has decided that the only way out of this mess is to lie to everyone about everything.

So I guess that in this environment, why not allow more cheating and obscuring of what is going on, as it is now the patriotic thing to do.

JTS

PS - Rivercard said over at P&R that the forum is becoming the "Doom & Gloom" board.

And I suppose that he's right.

But is so difficult these days to see what is going on, and yet have everyone and everything saying that you are wrong to be feeling that way.

It's somewhat like being in "V".

What's troubling is NOT the economy although it's seen better days, it's our reaction to what's going on which is causing the gloom and doom festival for me.

If the economy suddenly turned around and went gangbusters I wouldn't be any happier because that's not what's really wrong, it's our way of doing things, our rule of law, our ehtics that is THE PROBLEM.

I don't believe there is a problem we can't solve out there UNLESS, we refuse to acknowledge the problem.

Then things just keep getting gloomier.

It's exactly like an addiction problem, the addict wants to lie to themselves, and you have the enablers who help them do this to smooth out the situation.

The situation often times ONLY resolves when the truth is accepted, and the problem acknowledged and dealt with.

Wanting to allow insider trading is just a symptom of the denial disease, people know in their gut things are wrong but they're scared and they are afraid of the truth.

So lies run wild and otherwise good people enable them.

The truth is the way out, it has always been and will always be the correct way out.

The truth never changes.

Until people are perfect truth tellers the only defense we have against cheating and immoral behavior is our recongnition of it and our defenses against it.

Someone, somewhere has to draw a line, and toe it.

Moving the line is what a lot of people want to do out of expediency, out of all kinds of motivations, greed, fear, power, whatever.

We're never going to exist in a perfect world, but we can't exist at all in a world where ethics break down completely.

The system is based on trust, lying only undermines the trust, these people are in an ethical spiral of doom.

That's where the doom theme comes from.

 

[arthurracoon]

You make it legal to be a pirate in Armani suits.

You must be registered for see images attach

 

[Folster]

I can see the arguments both for and against insider trading. It would allow the price to be a reflection of all known information. I think most people want to see the captain go down with his ship though.