1 insider trading is not a victimless crime yeah, we may not be able to pin point the victim at a point of time

2 an insider is at a better position not by virtue of the hardwork he puts in but just by virtue of being an insider

3 insider trading leads to an unfair game, a scenario where there is no level playing field. it is like playing cards when you know what is the next card in the pile.

dear brothers
this topic has made me think a lot of time though a lot of people state what i have said in different words here, the fact that insider trading increases market efficiency is a major fact that go with legalizing insider trading.

i am a student of finance & investments and as a part of the MBA requirements i am doing a year long project on this topic, it is hard to find people who truly understand and appreciate this phenomenon and since you all are a few of those people, can you help me by sparing 5 minutes of your valuable time.

if you can fill up a questionaire which would hardly take 5 minutes you would be helping me in my project.

if you don’t mind helping me you can mail me at my email id

gmahtolia@gmail.com
i assure you that the information provided by you would be used only for academic purpose and would be kept confidential

i shall remain indebted to you for this kind gesture

govind mahtolia
sri satya sai university

While it is accurate to say that the insider allows a swifter reflection of breaking information in stock prices, he/she extracts a significant rent for this service. This rent discourages otherwise savvy investors who aren’t insiders from participating in the market, which in turn, reduces market liquidity, hence efficiency.

We do need more channels for faster, broader dissemination of breaking news — insider trading, while superficially capable of this, in the end hurts the market.

Thus, advocating insider trading is something like terrorists advocating self-determination in Kashmir — their exercise of such a “freedom to choose” will inevitably end up diminishing the very freedom that will make their choice possible. This is a paradox — an apparently liberal act leading to illiberal results.

Which sane person can support this?

An argument against “Insider Trading” is essentially an argument for misleading prices in markets. You can read the link to EconLog, which strengthens the point, or, you can make an attempt to understand how markets deal with information. Either way you would reach the conclusion that a ban on Insider Trading is in fact detrimental to the very share holders and market players you claim would be driven away if it is allowed.

Rather than compare it with Kashmir, which really is quite off the point, this is more comparable with asking the MD of Indian Airlines whether or not his planes are air worthy, and having him say that it was illegal for him to divulge that information. It would seriously heighten the risk and uncertainty of flying in the plane wouldn’t it?

Yes, absent insider information, market prices are misleading — this can be corrected either via insider action (where, structurally, the insider gains at the expense of everyone else less privileged), or via mechanisms for swift, & broad, communication of price-impacting information to the marketplace at large (here gains/losses are distributed solely dependent on a person’s existing position — the impact is random — sometimes he/she wins, other times he/she loses; either way he/she has placed bets about the nature of information yet to be made public, and so fully understands the risks taken).

Who will take risks if they are structurally set up to lose money?

Incidentally, a lot of people who have studied, and participated in, markets a long time (including this writer, professionally) oppose insider trading (it is illegal afterall), and for anyone to suggest that our views reflect a need for us to “understand how markets deal with information” is a bit presumptious.

Re. the Kashmir issue, I was simply pointing out how absurd and counterproductive outcomes sometimes result from seemingly reasonable choices — as will no doubt occur if insider trading is allowed per your prescription.

Regards.

where, structurally, the insider gains at the expense of everyone else less privileged

The only advantage that the insider has is that he knows a certain trend before the others. A trend which the others will eventually catch on to.

Yes, the insider will gain more, but I dont think it will be at the expense of anybody else.

Taking that line, I would wonder much like Ajit, how it is that ‘insiders’ benefit ‘at the expense’ of ‘outsiders’. If insider trading is allowed, and people do start trading based on information that is available to them within their company, and is not known to outsiders, and this is known, as you argue who would take a risk at investing in such a company? But that is precisely the point, if insider trading were allowed it could not possibly be misused (once it is an established rule) because it would be a known phenomenon, and people who aim to misuse it would eventually find themselves trading only inside the company.

At the moment the mechanism which prevents insiders from trading, by simpy declaring it illegal does not seem to adequetely ensure that they are not able to make trades at all, it simply makes the cost of getting caught high, and those that feel the gamble is worth it go ahead and gable anyways. Why not have it out in the open.