Regardless of the attitude of the individual, insider trading is currently illegal and can be severely punished by fines and imprisonment. When the government`s main crackdown on insider trading reached a crescendo this summer with the indictment of SAC Capital, something quite surprising happened. Conventional wisdom has shifted to a vision that, for a long time, was as unsavory as it was rare. People began to wonder aloud if banning insider trading was a mistake, a policy that should be repealed. The net inquiry has also reignited a debate over whether insider trading should be illegal. While proponents of stricter enforcement argue that the ban helps create a «level playing field,» critics argue that the cost of freeing markets for such illicit transactions outweighs the benefits. Some even go so far as to call it a victimless crime. I have more reasons (for example, an indirect way to pay CEOs and other insiders instead of having huge salaries), but that`s enough for today. Given how we all strive to make money in the market (otherwise you wouldn`t be on my website), there`s also the serious question of whether we shouldn`t venture beyond listed stocks and instead strive to gain insider knowledge in markets where we can use it freely and legally (i.e. everywhere except listed securities). With Professor Mannes` work, a broader public debate on insider trading could push the price of this book even higher. If you are interested in insider trading or like to own books that are increasing in value, I recommend buying a copy soon.
In general, insider trading means profiting from «important, non-public information.» It can be committed by an insider, for example: an executive of a company or a stranger who receives information from an insider. The mere collection of privileged information is not illegal. For example, a journalist can use internal sources to collect income data before it is disclosed and legally use it for an article. But the journalist would be breaking the law if he used this knowledge to buy the company`s shares before an ad drove up the price. Siegel notes that much insider trading is limited by rules that restrict insider trading. For example, managers and many other employees are excluded from transactions at sensitive times such as profit announcements. High-ranking insiders must report all their trades, not just the shares of their own company. «The rules are so strict about when you can buy or sell,» says Siegel. «All information has to go. I think they have a very strict application. There are no physical barriers to the flow of information.
The more information that circulates in a network, the harder it is for prosecutors to reliably prove their original source. Not to mention cases where insider trading takes a passive form, that is, a decision to hold a security instead of selling it. There are so many ways to circumvent regulation that most insider cases require authorities to find a «smoking gun» in the form of notes or recorded phone conversations. Needless to say, ever since we saw Gordon Gekko arrested on the big screen after a wiretapping operation, everyone in the financial world knows that if you don`t want to get caught, you don`t have to leave a trace. This 24-page report from 1987 continues to provide one of the most compelling reads on the details of the insider trading argument (Source: Digitalcommons Yale University) When company representatives use inside information for personal gain, they are committing a crime. Famous cases include Michael Milken (king of junk bonds), Martha Stewart (TV host) and Steven A. Cohen (hedge fund manager). There is nothing to be gained for society by sending him to prison, supposedly for the rest of his life. For institutional investors – pension funds, 401k plans, etc. – these losses far outweigh the benefits that could arise from civil insider trading claims and the phantom «police» benefits of these activities. Indeed, the only beneficiaries of these lawsuits are the well-heeled lawyers and government employees who participate in them.
There is a regulation that goes hand in hand, in my opinion. Insider sales/buying must be announced in advance. Maybe 24 hours? On the other hand, I don`t think the argument that allowing insider trading would improve market efficiency by using more information makes much sense. As Jie Hue and Thomas Noe write in their analysis of the topic for the Atlanta Federal Reserve, the existence of a sophisticated securities analysis industry in the United States means that we are not really facing the problem of a great lack of information. Just look at this year`s Nobel laureates in economics. Eugene Fama has shown that U.S. stock markets are essentially «efficient» in the sense of information. His co-winner, Robert Shiller, has done a great deal to show that this kind of efficiency hardly excludes periodic mania and panic, and that asset prices fluctuate much more dramatically than fundamentals.
But the large holes dug in stock theory indicate that herd psychology is the main flaw, not the hidden information that insider trading would reveal. In 2012, Congress passed the STOCK Act – Stop Trading on Congressional Knowledge. In fact, it was tantamount to admitting in Washington, D.C., that the system had indeed been manipulated in favor of politicians and their personal financial interests. The STOCK Act seemed like the right countermeasure for anyone who wanted to make the system fairer, but subsequent changes to the law only made it harder for members of Congress to monitor insider trading. Honi soit qui mal y pense. Again, regulation was more about visuals and narratives than about evidence and results. Only, it is simply no longer possible to hide these things. •Transparency. Let us say Company A buys Company B. If insider trading was legal, you could still force people to disclose if they are insiders. Disclosure or incarceration or imposition of a fine, etc.
This will force both companies to be much more transparent about potential transactions. Again, this leads to the fact that the company`s price reflects its true value. If Microsoft bought Nvidia tomorrow, wouldn`t you want to know the true value of Nvidia instead of letting it jump 10 points tomorrow? Undervalued-Shares.com regularly reviews stocks for which insiders have disclosed material transactions. If you know how to read these disclosures, valuable information and trading signals can be hidden between data points.