Where, exactly is the harm in insider trading?

I’ve never quite bought into this crime, probably because I never believed Wall Street was a level playing field. It’s nice to imagine Jimmy Stewart digging deep in his jeans’ pocket to buy two shares of International Harvester on the same information that Mr.Potter had but if that was ever the case, which I doubt, the age has long passed. The day of the individual investor out-smarting Wall Street is over, and our best bet is to buy index funds and track the big boys. Win or lose, we’ll follow their fortunes.

I studied the first insider trading cases while in law school, and wasn’t persuaded by the SEC’s and the Supreme Court’s logic. As the definition of insider trading has been expanded, I find the argument ever-less persuasive. We don’t have a neutral market – not when traders can move into and out of a stock in mere seconds – and we aren’t going to have one again. Day trading at home was always a fool’s game, and it’s more of one now. So is betting against professional traders who all have some sort of “inside” information, some of which is good, some bad, but always, their trades are based on their best hunches and best information. In that way, it’s a level playing field for the institutional traders, but retail customers, who make up an infinitesimal share of trading volume, are just dumb out of luck, as they’ve always been. To pretend otherwise just perpetrates the fraud.

17 Comments

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17 responses to “Where, exactly is the harm in insider trading?

  1. Riverside

    This is going to get uglier. This is really a gov’t assult on the Hedge Fund industry, and therefore Greenwich. Some of the biggest names in town will be under a cloud for a long time.

  2. Cos Cobber

    I agree with you. I havent figured it all out myself yet, but I am curious to see where great due diligence work collides with the state’s seemingly expanding definition of insider trading.

  3. Retired IB'er

    I can only speak to insider trading as a former M&A banker and I can say categorically in the context of the public sale of a company insider trading should, and is, prosecuted.

    The buyer is clearly making an illegal profit based upon material non-disseminated information. It is white collar crime, but still crime. No different than sticking your hand in a cash register while no one is looking and taking money that does not belong to you.

  4. Out Looking In

    Look Chris- there is insider trading and there is INSIDER TRADING. The former is certainly wrong, but the latter is unambiguously criminal. I’ve had my share of opportunities, and passed on all of them. Except of course, for a prize fight in Vegas that we KNEW was rigged. But we made it legit- flew someone out to the Vegas sports books from our home in Chicago to make the wager LEGIT. Took a dive in round one- he didn’t want to take any chances I suppose…

  5. Out Looking In

    More on insider trading-

    Of course, the idiots that tend to get caught, who never made on option trade for more than $20k in their lives, then turn around and buy $500k worth of calls for 10 cents that are due to expire in one week, that miraculously trade up to $5 when the news hits….they get what they deserve..

  6. Inagua

    Think Ivan Boesky. He made his living bribing investment bankers for non-public information about mergers. Do you really want that behavior to go unpunished?

  7. Libertarian Advocate

    Politicians almost always leave office substantially richer than when go in. No one will ever persuade me that Insider information and or opportunities don’t play a substantial role in that phenomenon. Speeches alone can’t account for it.

  8. Old School Grump

    Out Looking In at 9:33, you are so right about the options players and their way out-of-the-money purchases. Why do they think no one is gonna notice that the open interest in a call series went from, uh, 150 to 650 in the same day? Often it’s because they don’t even know what open interest IS.

  9. NoWorriesMate

    And the two rail guys that saw men in suits walking around and speculated why they were doing that at a rail yard? They are having their lives ruined. These lawyers at the SEC use your money to irreparably ruin peoples lives so in 5 years they get mega private sector jobs at law firms. Let’s see, where have I seen this before. “I wonder if we can make our careers and ruin theirs at the same time (using limitless tax dollars)”. Yes Valentine, I believe we can.

    THAT’s conflict of interest.

  10. armonk

    Two examples:
    1) An astute hedge fund manager gets a report that the Chevron corporate jet is in Pittsburgh and has the passenger followed to Gulf Oil headquarters and surmises that Gulf is going to be acquired. No problem, anyone could do that.

    2)A paralegal at a law firm tells her lover that she is working on a takeover of Gulf Oil by Chevron. Wrong. This should not be allowed to happen.

    Suppose that you sold your Gulf Oil shares the day before the offering, would that be OK with you?

  11. anonster

    @armonk – how do you feel if a trader gets visited by the fbi, then loads up on puts and sells off his stock because he knows the end is near?

    OK? Not so OK?

  12. edgewater

    but in reality it’s more complicated that the examples offered by armonk. it’s far more likely that the hedge fund guy, astute or not, is paying the pilot of the chevron jet for information. the hedge fund guys just are NOT that astute.

  13. JRH

    Riverside — a government assault on the hedge fund industry? Please, as long as the “hedge fund industry” gets to pay a 15% tax on their millions while the rest of us pay far more for our petty wage and salary income, I’ll reserve my sympathy for more worthy recipients.

  14. Lls2

    It ain’t cool being no jive turkey so close to Thanksgiving.

  15. Anonymous

    Long but interesting zerohedge article connecting some potential dots between SAC,Rabbi Balkany, Frontpoint and possibly GS. This stuff is getting downright entertaining.

    http://www.zerohedge.com/article/secs-insider-trading-case-implicating-frontpoint-sting-operation-aimed-sac-capital

  16. armonk

    @armonk – how do you feel if a trader gets visited by the fbi, then loads up on puts and sells off his stock because he knows the end is near?

    OK? Not so OK?
    Answer:
    Not OK. If something is wrong at the company then using that is inside info.
    What if the FBI visits and an exec knows the company is innocent and buys the stock? That is OK.

  17. armonk

    but in reality it’s more complicated that the examples offered by armonk. it’s far more likely that the hedge fund guy, astute or not, is paying the pilot of the chevron jet for information. the hedge fund guys just are NOT that astute.
    My answer: In the gray area, but I say OK.
    CNBC just made a stupid comparison about someone going to a Best Buy store and counting people going in and out. I guess that is “outside information.” Really, that is public, anyone can do it.