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Guest Post: Insider Trading: “You Can’t Regulate Uncertainty”
Submitted by Doug Casey of Casey Research
Insider Trading: “You Can’t Regulate Uncertainty”
On May 11, hedge fund billionaire Raj Rajaratnam was found guilty
by a federal jury of engaging in a seven-year conspiracy to trade on
illegal tips from corporate executives, bankers, and consultants. In a Conversations with Casey interview with Senior Analyst Louis James, here are Doug’s no-holds-barred musings on insider trading and the SEC.
Louis James: So, Doug, what’s your take on Raj Rajaratnam’s conviction?
Doug Casey:
It’s a disgrace. Rajaratnam is – or was – a productive member of
society who, even if he did break the law, may very well have done
nothing morally wrong –
Louis: Good grief, Doug,
you want the SEC to invite us over for tea and a chat? I know better
than to expect you to ever beat around the bush, but…
Doug:
The SEC is concerned with the enforcement of a set of stupid,
counterproductive, expensive, completely unnecessary, and destructive
laws. It does so by having its bureaucracy create a myriad of even more
stupid, counterproductive, expensive, completely unnecessary, and
destructive regulations.
Louis: But you’d say that about all government law.
Doug:
I would, actually, although I know that confuses some people because
there is an overlap between government law and what might be called
natural law. But this one is topical at the moment, and worth debunking
here and now, even though by this time next week, people will have
totally forgotten that the guy has been locked away for years… along
with about 2.2 million others now in American prisons – most of whom
absolutely shouldn’t be there.
Louis: Okay, okay,
but for the record – there must be a few snoops who read these things –
we abide by all securities and all U.S. law at Casey Research. In fact,
the ethics policy I had to sign and that is strictly applied to all of
us here at Casey Research exceeds SEC standards, because we not only
don’t want to run afoul the law, our reputation is our business and we
don’t want to give anyone any reason to doubt our integrity.
This
reminds me of your old stunt, asking the feds in your audiences to stand
up and identify themselves, because you knew who they were. Amazing
that you got a few to fall for that.
So… where to begin?
Doug:
With a definition, as always. The SEC’s definition of insider trading
is constantly evolving and growing, though the definition itself –
forget about its application – is imprecise and arbitrary. But, more or
less, it says that any officer, director, holder of more than 10% of a
public company’s stock, or anyone they talk to about material
information regarding the company, is an insider.
Like most of the
SEC’s rules, the ones on insider trading are arbitrary. They’re similar
to the tax laws, in that you often can’t know whether you’re breaking
them or not. You’d almost have to live with a specialized attorney to
keep from getting in trouble. They can’t be enforced in anything but a
sporadic way – basically to cause fear, in the hope that fear will keep
the plebes in line. But worse, they are unnecessary and destructive.
Louis: One thing at a time, then. Unnecessary?
Doug:
Yes. There’s nothing wrong with insider trading, per se. For example,
there’s nothing wrong with a manager, who knows his company will report a
good quarter, buying shares in his company in advance. This causes no
one any harm. Let me repeat that: the fact that an insider knows – or
thinks he knows – good news is coming and buys shares does not hurt
anyone. Actually, it spreads out the buying pressure and may help
everyone buy at better prices.
Moreover, if someone needs to sell
urgently on a given day, maybe for tax reasons, or maybe because their
kid needs an operation, then the fact that someone is in there buying
with gusto does him a lot of good.
Louis: But people say it isn’t fair.
Doug:
There’s no such thing as fair. “Fair” is necessarily an arbitrary and
contentious word, usually employed by busybodies and losers. You think
it’s fair to the antelope when the lion eats it? Was it fair to the
dinosaurs when Mother Nature wiped them out? Or how about this: is
giving everyone an equal share of something fair, if some worked for it
harder than others?
The guy who knows something and buys has not
taken anything from unwilling hands – just uninformed hands – and people
have to make decisions with varying amounts of uncertainty all the
time. You can’t regulate uncertainty or the uneven spread of information
out of existence any more than you can regulate the capacity to intuit
the significance of information into every human skull. Not only is it
impossible to do, it’s ethically wrong to try. If you’re no good at this
game, don’t play it. Life’s not fair. Get over it.
Louis:
I’ve long seen fairness as a false ideal, created by people whom I
suspect were simply jealous of those who had more than they did. It’s
the have-nots, or want-mores, trying to use power over others to compel
them to share what they would not share willingly, instead of working
hard to become haves themselves, honestly.
This has caused nothing
but harm to all people – especially poor people, actually – because
calls for “fairness” often wind up with the ends justifying the means.
Assuaging the plight of poverty-stricken people seems like a noble
enough reason, perhaps enough to justify a little bit of force, a mild
redistribution, especially from those who don’t really need all they
have… But this is not justice; it’s brute force with a benevolent mask.
And once a governing system has been given such power, it can use it for less noble goals – and in time, it always
does. So-called social justice is just the opposite of what it claims
to be. Taking from people what they will not give willingly is theft,
and by any other name, it smells just as bad.
Justice is hard enough to achieve, though it can be done, with effort. Fairness is just jealousy dolled up.
Sorry…
That one really gets me. Back to insider trading. Buying on good news
is one thing – what about on the sell side? What if someone knows a
company is going to be sued, or have a patent rejected, or some such
negative insider info?
Doug: What of it? So, they
get out before others do. Some kid gets to the water fountain before
the rest – it happens. And, again, it can spread out the selling,
actually blunting the impact of the bad news.
Look, there’s no
problem with insiders buying or selling based on their knowledge. Even
if news is kept airtight until it’s press-released, some people will get
it before others. Only the people paying close attention at that time
will be able to act immediately. Is that “fair” to everyone else? If the
exchanges slapped trading halts on every share every time a company
reported news, everyone would be trying to buy or sell the moment the
halts were lifted, greatly magnifying the swings, both up and down. This
would tend to cause more harm to all shareholders. The whole idea is
simply silly.
The fact is that there are many buyers and sellers,
each with different levels of knowledge, ability, and need, and the more
important differences – in understanding and insight, for example – are
internal and individual. There’s no way to truly level the playing
field. It’s an impossible ideal, and therefore a destructive goal.
Louis:
What if an insider knows there’s bad news and is telling people
otherwise, urging them to buy, like the proverbial used-car salesman who
fills a knocking transmission with sawdust to quiet the sound?
Doug:
Well, that’s fraud then. It’s got nothing to do with being an insider,
it’s got to do with lying. A crook is a crook, and he doesn’t stop being
a crook just because there are rules – rules just change the way he
cheats people. There are ways to deal with this – even laws, if you want
to use them. I’m not defending deceit, fraud, or theft. All I’m saying
is that it’s impossible for everyone to hear of financially relevant
news at the same time, and that it would be counterproductive if it
could be made to happen.
Further, if shareholders really want to
try equalizing trading opportunities by demanding certain policies
regarding trading and the handling of material information, they could
do that. This could all be dealt with by contract between the company
and its employees. Or by allowing exchanges to regulate this in
different ways, appealing to investors who care about different things.
Instead,
we get the SEC, which should really be called the Swindlers
Encouragement Commission, telling people it’s making sure everything’s
fair, thus luring the lambs to the slaughter. The investment world is
full of sharks, and it always will be – all the SEC does is lower the
average guy’s defenses, which really does encourage swindlers. Just look
at Bernie Madoff, a perfect example. The SEC has never prevented a
fraud, to my knowledge. Rather, by making everyone think they’re
protected, it makes a fraud much easier to perpetrate. Lambs to the
slaughter.
Louis: Don’t hold back, Doug…
Doug:
[Chuckles] It gets worse: adding insult to injury, the SEC costs
business billions of dollars annually – probably scores of billions, if
you take all the secondary and trickle-down costs into account: direct
fees, legal fees, printing, mailing, and other costs of compliance.
They
have a direct budget cost of something over a billion dollars per year,
but that’s trivial relative to the indirect costs they impose on the
economy. They ought to be ashamed, diverting a significant fraction of
GDP from productive use into the pockets of parasites, in the name of
protecting business and investors, when they do the opposite.
The
SEC is like a Pied Piper who attracts ravening hordes of rats with his
flute instead of getting rid of them – and then charges people tenfold
for the “service.”
This is one agency I would abolish, immediately
and completely. Not a single one of its functions should even be handed
off to other agencies. The SEC serves absolutely no useful purpose
whatsoever – just the opposite. It’s not a question of getting it under
control or paring it back. It should be eliminated in toto.
Louis:
On some level, I think everyone in the market knows this is true. They
go along with the insider trading charade because Big Brother is
watching, but they know they’ve read things others have not, they know
people others do not, they have relevant experience others do not.
To
hear the bawdy tales around the trendy pubs in financial districts,
everyone thinks they know something others don’t. Nobody is trying to be
fair – they are trying to win. Short sellers are perhaps the
brassiest of the lot; their very positions proclaim that they think they
know something others do not. Their counterparties to the short sells
know this and willingly enter into contract with them, pitting their own
knowledge and understanding against that of the shorts.
It’s all
about skating around the edges without crossing the lines… and for some,
it’s all about crossing the lines without getting caught. I think this
really is a case of the emperor’s new clothes, at least among investors.
But if everyone knows this, why does the myth persist?
Doug:
The public and the fat cats – and absolutely the politicians – all
think that a high stock market is, almost by definition, a good thing.
But a high stock market doesn’t necessarily mean an economy is doing
well, or that public companies are doing well – it just means there’s a
perception that this is the case. Or worse, in some cases – like now, I
suspect – it means nothing at all, other than that people are afraid to
hold currency, government bonds, real estate, or other assets and
so-called assets.
An artificially high stock market can send
dangerous, false signals to businessmen and investors. It can cause
false confidence – the kind Wile E. Coyote still has when he runs off a
cliff. But the government seems to love a high stock market…
Of
course short sellers love to see an overpriced market too. And speaking
of short sellers, I’d go further and say that they provide a very
valuable positive service to other market participants.
Louis: How so?
Doug:
To start with, they’re always on the lookout for frauds. They’re really
the policemen of the market, taking down inflated stock prices of bad
companies and alerting other investors of the danger.
Plus, when
they short a stock, no matter how the trade goes, they have to actually
buy it back at some point, to be able to deliver on the contract. If
they are right about a company being grossly overvalued, their selling
provides a warning by driving down the price. Further, they are there to
provide a bid after they’ve been proven right. By then, almost no one
else is buying, and the shorts offer some liquidity, a bid, to the fools
and amateurs who didn’t do their homework. And if they are wrong, being
forced to cover their short position can push the stock higher, to the
benefit of the incorrectly judged company.
Louis: So, it’s the Wild West?
Doug:
First, the Wild West wasn’t nearly as wild as Hollywood has made it out
to be. It had an unregulated economy that worked quite well most of the
time – better than ours does now, I’d say, given the huge wealth it
created for so many people who had the grit to go out there and take
nature on. But that’s a conversation for another day. Second, “security”
is a fiction – it doesn’t exist once you leave your mother’s womb.
What
I’m saying now, to use your metaphor, is that at least out in the Wild
West, people knew that they had to be on their guard and take extra
care. In the so-called Civilized East, that was just as true – but the
need was masked by the veneer of civilization, and people were conned in
droves.
And that’s still true today; every investor who enters
the market needs to understand that on the other side of every single
trade he makes is another human being. As in all walks of life, not all
human beings are equally honest, or smart, or friendly. Remembering this
would encourage investors to do more homework.
Louis: So, back to Raj Rajaratnam. He didn’t do anything wrong?
Doug:
I don’t know – I don’t have all the facts of the case at my disposal.
If he did something unethical, shame on him. From what I know, it would
appear the possible real wrongdoers were the executives of the companies
who relayed information to him – if their deal with the company
required them to keep it confidential. Of course, if that was the case,
then Raj may have been guilty of receiving stolen goods. But that is not
what he’s been convicted of. He’s only been convicted of breaking SEC
rules.
But I do know one thing: Raj was a very smart and
productive guy – that’s how he became a billionaire. Now, instead of
creating value and wealth in society, he’s going to be locked up in a
cage for years and transformed into a burden on society.
In any
event, if he committed a tort, it should be the subject of a civil suit.
It’s not something that should automatically be the subject of a
criminal prosecution. If a crime is involved, let an action be brought
by the party who was stolen from – not by a government agency, acting on
its own.
Louis: Well, if people want to help
him, Rajaratnam’s brother is leading a letter-writing campaign. But the
SEC isn’t going away anytime soon, so this is all academic. Are there
any real-world investment implications you want to point out?
Doug:
Sure. Remember that government regulation is just another distortion in
the marketplace, like taxes, trade barriers, inflation, and so forth.
All such distortions have consequences, and one of them is to create
opportunities for speculators. I haven’t done it, I confess, but I think
someone who studied the SEC’s predatory behavior could make a
substantial fortune predicting outcomes. It’s full of young hotshot
attorneys looking to make their bones by attacking guys like Raj. Then
they can join a law firm and charge $1,000 an hour to defend clients
against the next crop of hotshot young SEC attorneys, who will do the
same thing. It’s a very corrupt system.
Louis:
You’ve said things like that several times. It occurs to me to ask what
speculators would do in a true free-market economy, where there are no
such distortions?
Doug: We’d all have to find
another line of work. In a free-market economy, there would be very few
speculators because there would be very few distortions in the way the
world works.
Louis: I think I’d become a venture
capitalist. It’s the next best thing – plenty of volatility and
speculative upside… but it is riskier, because you’re betting on
specific innovations, not trends that have to play out sooner or later.
Doug:
Perhaps I’d invest in nanotech research, to hasten the day when they
can rejuvenate my body and I can play polo properly again. But for now, I
really want to urge people who agree with us about the SEC to think
long and hard about the issues. They should be crystal clear in their
minds, so they can raise their voices in opposition when others around
them mindlessly parrot the party line on insider trading.
Hope may
be scant of changing the system, but that’s no reason to hesitate to
debunk erroneous conventional wisdom. It should be debunked because it’s
the right thing to do, and because falsehoods and lies are everyone’s
enemy. The current corrupt system will go the way of the dodo
eventually, on its own. But the more people there are reminding everyone
that one just can’t escape the “caveat emptor” dictum, the sooner and
the easier the transition will be.
But most of all – the most practical advice I can give investors now – is not
to be taken in themselves by the SEC con. There are more sharks than
ever in the water, and nothing the SEC does reduces that number. Always,
always keep your guard up and do your homework. Start with researching
the people in any given play. That’s what we do at Casey Research:
People is the first of our eight Ps of resource speculation.
Louis: Great – words to the wise. Thanks, Doug.
Doug: My pleasure, as always.
»
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Better still get rid of the casino.
jal
+1
Doug: What I’m saying now, to use your metaphor, is that at least out in the Wild West, people knew that they had to be on their guard and take extra care. In the so-called Civilized East, that was just as true – but the need was masked by the veneer of civilization, and people were conned in droves.
The best spot on blurb of the interview
Exactly. It's a false sense of security which provides little relative benefit and, instead of mitigating losses, actually profoundly increases them.
Its all one big happy debauchery
http://www.theatlantic.com/politics/archive/2011/05/are-members-of-congress-engaged-in-insider-trading/239564
Insider trading doesn't matter....... what makes it so profitable in the first place, is what matters.
Would insider trading matter if there were speed and position limits on trading? Would insider trading matter, if decisions couldn't move markets that drastically? Would insider trading matter, if investors weren't stupid lemmings, and would understand the longterm trends of markets?
Insider trading is made so profitable, and thus unfair and damaging..... by a fucked up system. Fix the system, and insider trading effect would be insignificant.
You also can't regulate stupid.
Though, being Amish and selling unpasteurized milk can be prosecuted to the full extent of a made up law.
I didn't read this whole thing (I couldn't), but Casey's arguments seem to me to be a lot of tortured logic to say to non-insiders investing in the stock market - we own the market, the law, the government, so f**k off.
Actually, he's saying that if no one could "own" the market, a little frontrunning would be of much less significance. If a market cannot be moved by a handful of people like a toy, how much harm would frontrunning do?
EDIT: Phrased another way, when it comes to insider trading, the argument usually consists of:
1. Envy: They know ahead of time and thus can get an advantage (where the intensity of this advantage is undefined)
2. They have a lot of power to influence the market, and can this way exploit the market by being the one who moves the market, and a trader, simultaneusly.
I don't care about 1., as long as it's intensity stays low. Regarding 2., i ask: Why has someone so much influence on the market, in the first place?
I look at it from a different perspective. As an analogy, let's say you're living in a city with a rotten, corrupt and useless police force. Your house gets burglarized. The police do nothing. Is the answer to the problem that your property was stolen and the police did nothing... to legalize burglary? Would it be okay if the guy breaking into your house only took the $100 he found laying on the kitchen table?
You've just described every police force in the US and possibly the world.
It would not be ok to steal from someone even if the state is not around to prevent you from stealing or willing to go after the people that steal from you. Theft is theft even if the law exists or not. Casey made that point.
Insider trading is not theft. It harms no one, it can't be prevented, and it's enforcement is sporadic and arbitrary and always after the fact. Furthermore, it's difficult to know if one is even violating the law at any given time. Someone who trades with knowledge that may or may not be relevant that may or may not be correct that may or may not be within the time frame to affect the price is not stealing from anyone.
Someone who breaks into your house and steals your property is obviously committing theft whether a government has a law or statute limiting theft or not. Even though laws exist forbidding theft, people still have locks on their doors to prevent people from stealing. The analogy does not apply.
Better analogy: Someone knows a rich dude who grew up in your house and will pay a million bucks out of pure sentimentality. He offers you $250K for the house, and you sell. He turns around and sells to the rich dude for $1m.
And that's totally legal.
<<Insider trading is not theft. It harms no one, it can't be prevented, and it's enforcement is sporadic and arbitrary and always after the fact.>>
I totally disagree with you. Except - the laws should be consistently and competently (not sporadically and arbitrarily) enforced. Of course after the fact. You can't enforce laws against crimes before the fact for the most part.
Define two things:
1) An insider.
2) His victim.
Ilene is correct. The logic is the same as/is producing our monetary collapse and concentration of power and wealth.
As the system collapses there will be a day when "populace" will no longer play the game. The resulting internal circular firing squads will finish off the era as they slaughter one another. HFT is just the beginning.
The excuse is that killing commerce is ok for it is consistent with saint "animal spirits".
off-topic -- here's an elliott wave count showing the possibility for a market plunge beginning either tomorrow -- or Monday/Tuesday.
http://jeffreygtc.blogspot.com/2011/06/thursday-june-2nd.html
I don't agree with most of what he says as the markets are constantly manipulated by insiders anyways, but I will agree with him that the rules to make things seem totally fair are total bullshit.
Only thing I would say is that when it comes to our politicians, the rules need to be clear and more harsh as to ensure that they do not personally benefit from the laws they help create-- this is how the stigma of high stock prices = good things for the real economy for policymakers that Doug mentioned can be harmful and misleading. Here's an idea: you want to run for office? Then donate your stock holdings to charity or liquidate everything before assuming office and you should only survive off of the salary and pension given to any other federal worker. Certainly would weed out a lot of assholes or at least the first wave of them.
And then there are those who are sanctioned to profit from insider trading...such as...congress?
According to Forbes...yes:
Insider Trading Rules That Don’t Apply To Congress
"...that one thing you can do as a member is study pending legislation and regulatory changes, call up your broker and instruct him to trade on that nonpublic information. Do this as often as you want; you will suffer no penalty. There is no limit to how much money you can earn on insider trading in the House or Senate. Lawmakers and their staffers are specifically exempted."
"It’s not an accident that Congressionalites are expressly exempt from insider-trading laws. The reasoning is that, were the situation otherwise, “it might tend to “insulate a legislator from the personal and economic interests that his/her constituency, or society in general, has in governmental decisions and policy,” says the House ethics manual."
"In what must be treated as more of a practical joke than a serious effort at legislation, every so often a group of lawmakers typically numbering in the high single digits proposes that Congress be subjected to the same insider-trading laws as you or me. Said proposal is always swiftly ignored — it has yet to reach the House floor and hasn’t even been bandied in the Senate."
FULL STORY HERE:
http://blogs.forbes.com/kylesmith/2011/06/01/insider-trading-rules-that-...
Are you mad yet?
"Yes, the SEC is about as useful at tits on a bull and not having to worry about them enforcing actual laws for a publicity stunt would free up some time. Thank god there are dark skinned foreigners to take the fall... I wonder if they will link him to Al Queda? We really should start building a case to invade Pakistan or India or wherever he comes from...good for business and all that...
Besides, who wouldn't want more time to spend playing polo."
Doug sounds like a real fucking idiot. No doubt Rob Rubin in disguise. Not that the SEC deserves any credit, mind you, but the securities laws, like Glass-Steagall, were forged in the fires of the post 1929 crash. And getting rid of Glass Steagall has worked wonders for the economy.
Dumb ass.
What are you talking about? Robert Rubin? Get fucking real. I've heard Casey speak many times and he's certainly no friend of Wall St or Wash DC. You're dead wrong on what he's trying to say. Why have regulators (the SEC, CFTC, etc..) when they dont do anything?
And what did he say about Glass Steagall? Nice job of putting words in his mouth and drawing your own conclusions Ned.
Regulating our financial markets is like volunteering to referee a friendly game of winner-take-all poker at Cell Block D in San Quentin, on a hot night, with the players all denied parole that same day.
Which reminds me..... we really conceptually need some distinction, between regulation in the form of rootlevel market rules (the market model itself), and and "regulation" in the form of "patching the holes of the model" (nowadays, the patches are mostly imaginary).
We don't need regulation, but leaders with real character and moral fiber.
Oh, and it would help if they had a shred of humanity and decency put into their souls.
Speed limits on trading ARE regulation. Position limits ARE regulation. Limits on how much influence individual "agents" can have on the market ARE regulation.
You want regulation. What you do not want, is all the pointless bloat and useless patchwork on top of it. You just want a fair set of "gamerules" (which involves regulation!), minus all the useless hackfixes, that benefit manipulation more than it prevents it.
Simple example: In a totally unregulated market, there are no restrictions on monopolies and "marketmakers" at all.... anyone could grow infinitely big, and become infinitely small.... thus rendering the idea of a "free market" ad absurdum.
Or even shoter: You want fair, reliable and consistent gamerules, that work on their own, without arbitrary, uinpredictable and abuse-prone dynamic "intervention".
Nice try RYnAk.
I don't want regulation.
I don't want position limits.
I don't want a free market.
I don't want "fair, reliable, and consistent gamerules"
I want honesty.
In a totally unregulated market, there's no such thing as a "monopoly." Monopolies are always and everywhere creations of the government, either by directly owned government enterprises, or special government charters.
The SEC has become a farce just like the commentator.
Anyone who thinks markets regulate fraud is a jackass on steroids.
Markets are as incapable of regulating fraud as the SEC. Fraud is rarely uncovered in its earliest stages because the signs generally aren't there. Only the most idiotic are caught straight away.
So realistically, the SEC acts just like a police department. People believe there is security because they exist, yet they ignore the fact that crimes still occur. They become aghast when frauds are revealed rather than understanding they'll be perpetrated with or without police. The only difference is that without the police, you are fully aware you're the only person capable of looking out for yourself. With the police, it becomes easy to believe in the fantasy that you live in a civilized world and may dispense with such concerns as self defense or thoughtful consideration of your actions.
The difference is without the SEC, there would be a variety of competing certification bodies, whose business would be based on establishing a record of actually being good at sniffing out and exposing fraud. The SEC has a monopoly on that activity, therefore it doesn't have to actually do it with any effectiveness whatsoever to maintain it. The SEC failed to catch Madoff, but too bad, they're still in charge.
In a free market, Madoff would have made the "SEC Approved" label a liability, and there'd be some other company offering the same service, but actually good at it.
"I’d invest in nanotech research..."
I believe it's been a few weeks since I last noted
CVV, bitchez!
:-)
This from pump-n-dump Casey? Awesome stunt, TD!
I am no fan of the SEC. I think we have way too many laws. But Casey's arguments are just reductio ad absurdum in one direction. Let's take it the other direction. My grandmother has owned a utility stock for 47 years and has been reinvesting dividends. She now has 5000 shares and she has been thinking about selling if it gets to 50. The morning of a board meeting for this company the stock is at 49 3/4. A board member is sitting in the meeting voting on accepting an unsolicited takeover offer. As the vote passes he I-phones an order to buy 5000 shares at the market. This order takes out Granny's offer. He buys her stock. One minute later a news release takes the stock to 70. Did he steal her money?
Honestly, if Granny had a target price with no basis other than the price, she has no right to complain. She sold for silly reasons and lost out on an opportunity..
If she sold because she believed incorrect ideas, she made a bad investment decision.
In neither case was she forced to sell by anyone. She chose to. She made the bad decision, not the buyer.
Put it in another example. I have a house and I decide to sell it. The guy who buys it from me knows about plans for a commercial development of which I'm unaware. He ends up selling it for 10% more than he paid a month later.
Should that be illegal, or is that just a good investment decision?
Your sob story about grandma means nothing. What does it matter if g-ma holds on to the stock for 47 years or 47 seconds? It doesn't.
Does the executive know he/she is buying g-ma's specific shares at the time? Nope.
Does the executive know that their earnings release will raise the stock price of the company? Does this executive know that there are people in the market willing to put major bid orders in at the very instant positive earnings are released? Does this executive have the ability to see into the future?
article not worth reading, move on. Love these guys who endorse no regulations, etc. kind of like the failed ideology of greenspan who thought these folks would never do anything bad because it may hurt their reputation. Although he worked on wall street, so I know he didn't believe that.
I'd love to see them cry foul as soon as they own something that goes bankrupt where the insiders and friends got rid of their holdings soon enough.
this guy is a looser. hedgies are a productive member of society he says. WTF. he made billions trading stuff, can someone please tell me how trading makes one a productive member of society. in fact kind of the exact opposite don't you think. zero sum game.
now if you pick someone like einhorn who exposes fraud and mis run companies, and dangers maybe. but 99 perecent of these people are not productive members of society.
I must say it's refreshing to read an article where the vast majority of the comments don't come from foaming-at-the-mouth NWOers ranting about "the Oligarchy" over, and over, and over again.
I see a lot of comments here gnashing wildly at the beliefs presented in this piece. What I don't see are any counter-arguments based upon a logical conclusion.
Try as I might, I cannot overcome the fact that the seller of stocks to a buyer with inside information has made the purchase possible by making a bad decision.
Where is the victim? It takes a willing seller for an insider to profit. There is no force involved. The seller is obviously ill-informed if they're making such a bad decision (they believe the complete opposite of what's true).
If there's no fraud perpetrated, such as disseminating disinformation to affect the market and scare people into selling, I don't see the crime.
A good effort. But a lot of these people just have an Oliver Stone/Wall Street level of understanding of this.
You're right though. And I'd take it a step futher: purhaps the seller and buyer are both trading on insider information. How would it be possible to know whether the seller or the buyer is at fault? It isn't. The law is arbitrary.
I really would love to work for you. I'd want to be the CFO of a company you owns as shares. Then I would be allowed to keep information from you, e.g. about a dire financial situation *and* to benefit from it by selling the shares which will go down while you still own them? And I'd sell the information to all my friends for a bit of extra cash, which unfortunately will push your shares down a bit more.
Sorry holding those was a bad idea ... oh and thanks for the paycheck.
And since the guy is speaking about dispersion of productive money. How easy do you think it would be for corps to raise money through the stock market (i.e. put it to productive use) if everybody rightly expected, that they'll get ripped off by everybody working there?
I must say I do like this article! Thank you ZH.
This is the mindset of the people we just bailed out.
Since the shareholders are the owners of the company wouldnt they have priority to make buy/sell decisions based on material non public information? Otherwise, we owe a huge apology to the family of Ken Lay and the other fiduciaries of Enron. You have the moral fibre and class of a large booger.
I don't really follow your argument.
No one is defending Enron. Enron was involved in fraud. This article never said fraud should be legal.
However there is no reason Enron "insiders" should have been prevented from selling their stock. All it does is hinder price discovery. Those swindled by Enron would have lost less if insiders had been able to sell. Those who bought before the crash would have bought at a lower price. The point is it did no one any good to prevent them from selling, quite the opposite. It just made the victims hurt a little bit worse at best.
Also many would have taken the due dilligence to see Enron as the fraud it was had they not been lulled into a false sense of security by the SEC.
The majority of shareholders of Enron were not involved in fraud. You have a twisted sense of who the insiders are. The insiders are the equity owners of the company NOT the fiduciaries. The stockholders are #1 in the pecking order. Buy a restaurant and hire Pee Wee Herman as the cook. According to your logic when the business begins to fall apart its ok for Pee Wee to sell all your stuff and hit the road.
I never said they were. You're real good at avoiding the real argument.
And what if the CEO is a stockholder? He doesn't also have a duty to himself? As long as he isn't telling everyone the company is doing fine when it is really in the shitter then he's stolen nothing from anyone and he has harmed no one. He's only contributed to better price discovery.
That's a strawman and you know it. Try again when you feel like actually attempting to refute my real argument. Pee Wee selling his own stock in the business does not equal him selling off company property such as pots, pans, and stoves.
I really would love to work for this guy. I'd want to be the CFO of a company he owns as shares. Then I would be allowed to keep information from him, e.g. about a dire financial situation *and* to benefit from it by selling their shares which will go down while he still owns them?
Besides, if there wasn't such trust about minimum standards of fairness established in the market, it would become a lot harder for business to raise capital, because everybdoy would (probably correctly) assume, that as a shareholder they'd get ripped off by the insiders.
If you're lying about the dire financial information then it is fraud. I doubt a financial situation would become so dire overnight without fraud being involved that your argument here could make any sense. Otherwise you're just preventing price discovery from doing its job and arguably allowing more people to be swindled for more as they bought the stock at a higher price than it would have been at had the CFO not been prevented from selling his shares. (Edit:fixed this sentence now sorry)
This makes no sense at all. It only means that people would have to exercise due dilligence. What about the massive amounts of REAL fraud in the markets that goes on every day?
Why can't reputable businesses have a policy about such things, why must arbitrary rules by enforced by the SEC? Why can't "fiduciary duty" be a contractual agreement with their own shareholders? How do insider trading laws protect anyone when the vast majority of it goes unprosecuted and the laws are selectively enforced by a captured regulatory agency?
The last sentence is like the question "why is theft of bycicles still illegal when so many bycicles are stolen every day?" Not sure if you have an answer to that.
Have anything to say about the rest of my argument? But let me make that last sentence more clear.
I'm saying when the rules are selectively and arbitrarily enforced by whoever owns the regulators then the people who own the regulators have the truly unfair advantage. Look up the wikipedia article on "Regulatory Capture", something which the SEC certainly suffers from.
My point is that because a system is not perfectly effective still does not mean that doing away with the system creates a better situation.
It might, but in this case I don't believe it.
And, speaking of the rest of your argument, allowing insider trading creates an incentive for insiders to create situations where they can benefit from the information. Humans are very much incentive-driven and if you create a situation where rewards can be reapt, humans will make sure more of those situations will arise. I'm not speaking of outright lies, but delayed information, information that is frontrun so much that by the time it hits the market it will be worthless, etc. Sure some of this happens already, but I prefer that to all of it happening all the time.
That's precisely the reason why insider trading laws are ineffective. They create an additional incentive to violate them. You create a bifurcated market for information and then insider information is trusted more than public information because it's already been "priced in". If you remove the insider trading laws, you diffuse the effectiveness of "insider" information. Then it becomes just a rumor that needs to be backed up with real information or analysis.
redundant comment - removed
I am guessing you believe that fraud should be outlawed, ie regulated. Poor logic to defend not regulating.
Fraud is theft though, and it violates the natural rights of another individual. Insider trading in itself is not fraud though.
I've noticed no one who defends the SEC has the ability to distinguish between being the victim of fraud and simply being beaten by someone better, smarter, more knowledgable, or just plain luckier. And they all think that if you eliminate the SEC's job of preventing "unfairness" (i.e. being beaten), then you've made fraud legal.
So this one won't work either I guess:
/>http://www.gata.org/node/9977
Following Worldcom and Enron, SEC raised transaction fees to stop the next fraud. That worked out well. First order of business, spending hundreds of millions on a brand new building.
You want a fair public market? Make stock purchases random. You give your money to the broker and you gets whaat the computer picks...Didn't say it would work or is sane - just fair.
Sell your paper silver for time being
http://deadcatbouncing.blogspot.com/2011/06/silver-breakout.html
Article is spot on and there can be a million more like it for every government agency; they are all a waste. Anybody who thinks insider trading should be illegal is envious. Simply because a person has some "inside" knowledge and acts on it to profit shouldn't be a crime. They haven't violated anybody's property rights, I say all power to them. Going after these people, enforcing this law, and taking them to trial costs a lot of money for a "crime" that did not cost anybody else money because nothing was stolen and nobody was hurt. Only a total moron would think this should be a crime.
This article also brought a lot of the closet socialists out of the woodworks, too. The reality is that the market DOES punish fraud of actually allowed to function. People have this delusion that the most prominent expropriator of property will defend peoples' property rights (the State). How naive can you be? Really, let's do a quick comparison.
Government - Aka extortion racket, uses violence and threats of violence to steal from people and impose its will on the unwilling. Has made absolutely no real contribution to humanity, and has no real incentive to meet the needs of people because they just take what they want through force like any other common criminal.
Market - Exists because of voluntary transactions through consenting individuals. Rewards those who meet the most urgent needs of others and punishes those who don't. Has provided tremendous innovations in everthing from travel to telecommunications to medicine. Has a natural incentive to meet the needs of others.
Gee, which of those two would I trust more? I'll go with the market. This type of article/thread really shows some of the people who post here true colors. Nothing more than a bunch of statist pigs; just threaten people with violence when they don't do as YOU want. I know critical thinking is hard but maybe one day some of you can try it.
Guys like Casey seem very fond of this predator prey metaphor to describe the markets. It seems to be getting used a lot by those who advocate less regulation is more. My question for Casey and those who share his view is this; what happens after the insider lions eat the last antelope?
If you implement Casey’s philosophy to the max, a market ultimately evolves where there are only a few big winners and everyone else becomes a loser. Relevant inside information itself only gets sold to the highest bidder and only those who can afford it will have a chance to make any money on their investment. That’s an unsustainable condition too, because, eventually all the losers either die off or leave on their own accord, and then the winners no longer have anyone to win from. Casey essentially admits this himself by saying:
The whole idea of public companies and public markets was to create a forum where every investor has a reasonable chance to share in the profit. The individual gains will be different, of course, depending on individual abilities as he describes, but, everyone gets a piece of the action. It’s not a winner take all event. This was the big lure that persuaded the average Joe to help provide capital for corporate growth, innovation, and all those great things that even Casey would probably argue are essential for a robust economy. It was also the big promise that got average Joes to fund some of their own retirement, so that corporations and the government didn’t have to do as much of it for them. Is Casey prepared to give up all that to defend his ideas? Who will he sell his services to then? I agree that insider rules are fuzzy and imperfect, and that watching a guy like Raj Rajaratnam get busted is kind of like watching a guy get a speeding ticket while hundreds of other drivers are still speeding by. But you have to draw a line somewhere and do your best to defend it. Otherwise, we go back to the days when only people like the Rothschilds, Vanderbilts, and Astors participated in the capital markets and everyone else saved the few pennies they had in a kitchen cookie jar.
"If you implement Casey’s philosophy to the max, a market ultimately evolves where there are only a few big winners and everyone else becomes a loser."
That's been proven wrong countless times ever since Marx first came up with the idea. The only way you get ahead in a market is by making other people winners, because it turns out that if your products just make people's lives worse, they stop buying them (unless the government forces them to).
I agree with you- draw a line somewhere and try to defend it. I guess too many of us can't see a problem, and those that do are probably sickened,... either very skillful career traders, or saving pennies in a cookie jar.
Why not draw the line at a place backed by objective reason, not your subjective notions of what is "fair"?
So... if 'anything goes' why even TRY to regulate it? Is THAT the message?
Got to love the laissez-faire crowd - are we supposed to just accept the fact that this is a rigged game and leave the cess pool to those who can stand the stink?
Regulation worked for decades - DEREGULATION let this current disaster occur. The problem is that the SEC won't go after the BIG criminals.... a few sacrificial lams are offered up periodically while the pillaging continues unabated. The revolving door between government and business has undermined any possibility of real enforcement (never mind the weak and useless 'reglations' passed by bought off politicians). The foxes own the henhouse and dine at their leisure.
"Got to love the laissez-faire crowd - are we supposed to just accept the fact that this is a rigged game and leave the cess pool to those who can stand the stink?"
Yep, that's pretty much what they're saying...
Are you capable of actually putting forth a real logical argument or only acting as an echo chamber for those you agree with?
Also are you capable of creating an argument that isn't a strawman?
"Nationalize the Oil Companies" ROFL
Many others have made logical arguments on why illegal insider trading is illegal.
So copying/pasting "echoing" is my chosen method of agreeing with arguments that have been made many, many times before.
If you are really interested, definitions of illegal insider trading and logical arguments are made on the sec's website:
Insider Trading
"Insider trading" is a term that most investors have heard and usually associate with illegal conduct. But the term actually includes both legal and illegal conduct. The legal version is when corporate insiders—officers, directors, and employees—buy and sell stock in their own companies. When corporate insiders trade in their own securities, they must report their trades to the SEC. For more information about this type of insider trading and the reports insiders must file, please read "Forms 3, 4, 5" in our Fast Answers databank.
Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.
Examples of insider trading cases that have been brought by the SEC are cases against:
Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the SEC has treated the detection and prosecution of insider trading violations as one of its enforcement priorities....
For more information about insider trading, please read Insider Trading—A U.S. Perspective, a speech by staff of the SEC.
http://www.sec.gov/answers/insider.htm
See also this discussion: http://www.sec.gov/news/speech/speecharchive/1998/spch221.htmYeah "deregulation" caused this. 70,000 pages of regulations enforced by over 100 federal agencies and departments; definitely a lack of regulation. Remind me, what were/are the most regulated parts of the US economy? Banking, mortgages, etc. Which parts went to shit the fastest and the hardest? Oh allknowing bureaucrats please regulate more than stealing half of my income, please I just can't live life on my own!
"Any Regulation of Risk Increases Risk"
http://arxiv.org/abs/1004.1670
I always suspected as much on the gut level, any regulation usually makes things worse not better.
I thought that the efficient-market hypothesis would mean that insider information couldn't possibly be leveraged to advantage. Isn't all information supposed to be priced into a stock or index instantaneously?
There’s that predator prey metaphor popping up again. It is unique though, being the first time I’ve heard of sharks slaughtering and eating lambs.
If there is anything that should be carved into the Stone Tablet Of Myths it is the idea that some kind of self regulation and market-wide risk management existed and worked in the financial industry during the last decade to provide a reasonably safe place for investors to put their money and earn a real inflation adjusted rate of return. And to be sure, it wasn’t the SEC that originated and pushed this myth on unwitting retail investors to bamboozle and snare them into becoming the lowest foundation blocks in the investment community and fodder for inside players like Raj. That title goes to the financial industry itself which is still practicing it today. “It’s so easy babies can do it “, says E-Trade. “Just follow the green line” says Fidelity, “We’ll take care of the rest for you”. Please ignore the fact that the green arrow is pointing to a spot where one of their funds recently lost over $250 million betting on yet another Chinese fraud company.
Admit it folks, the financial services industry is 75% sales; selling bullshit like it was some secret password to enter King Solomon's Mines. What else is Casey’s interview dialogue but mostly a sales pitch for his financial management services laced with philosophy that appeals to his typical clients, who I imagine have profiles a lot more like Raj Rajaratnam than most of us do.
Downtoolong - (I'm going to echo again...) You're right. This article by Casey disturbed me, not just because I disagree with his point, but because his essay reflects the thinking that has morally crippled the upper levels of finances and politics. On Phil's Stock World, I often post articles I may disagree with when they present solid, rational arguments on subjects that are worth thinking about. There's always a chance to learn things and change one's mind. But Casey's article fell far short of that level. I didn't just find little merit in his arguments, I felt disgusted by them. And (for the guy that likes objectivity, sorry), that test is subjective.