Insider Trading: Is it really that bad?

Hurts retail investors quite a bit, since they would have less information than those making the trades.

I don't think its a moral thing, I think its a confidence thing. If the average joe thinks he can't do well in the market, he is going to seek alternative investments to those that fall under insider trading. He loses confidence, he pulls his money and the market suffers.

I think the market is probably ripe with insider selling and buying, it just doesn't get that much attention.

In theory it harms the market because outsiders are always at a disadvantage and this prevents the market from "clearing", at least for a thinly-traded security.

In practice, I'm not so sure. Here are counterexamples:

1) There are plenty of countries that allow practices we would call "insider trading". Remember this next time you hear about how foreign CEO's don't make as much money ...

2) US Senators and Congressmen are exempt from insider trading regulations even though they pass laws affecting companies. Several studies have shown they beat the market pretty handily, too.

3) Every time a private business or real estate is sold, it is sold by an insider. And yet the trades take place.

So no, I don't think it's that bad.

Insider trading laws force the captain to go down with the ship. If CEO's were able to bail out before "regular" share holders they could do some pretty shady things that benefits them greatly and screws the company and share holders.

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Insider trading laws force the captain to go down with the ship. If CEO's were able to bail out before "regular" share holders they could do some pretty shady things that benefits them greatly and screws the company and share holders.

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Not really. The CEO of any publicly traded company is already very wealthy, the incentive to cheat simply isn't there.

For example, if I had significant ownership in a traded company, I could simply borrow a couple hundred million and post my stock as collateral. That is not reportable as an "insider trade" because I still own the stock.

Honestly, these regs are something of an anachronism.

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The CEO of any publicly traded company is already very wealthy

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Not many people are content with their net worth. particularly someone in a CEO position. They don't usually become a CEO by becoming complacent.

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so what do you people think?

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When I worked at a publicly traded company I was considered an insider because I was in 'senior management.' We would always know what our earnings announcement was going to be about a week or so in advance of the news release. Because of that we also knew how the earnings release would be received by the market and what the immediate impact on our stock price would likely be. I believe it would have been unfair for any of us "insiders" to have been allowed to trade on that information just because we worked at the company.

For example, one particular quarter we knew we were going to have a loss for the quarter when the analysts' consensus was for a small profit. No doubt our stock price was going to take a hit. I could have shorted our stock and made a killing. I can appreciate how the insider trading regulations protect investors who are not privy to such information.

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Does it hurt the economy?

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I believe it would hurt our stock market if the public thought insiders could make trades based on their insider information. This can be empirically proven by looking at foreign stock exchanges which do not enforce insider trading regulations. The public basically will have nothing to do with investing in the stock market in those countries. All investing is by institutional investors and the even their investment amounts are very small. It effectively prevents a liquid stock market from developing.

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It is morally wrong?

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Yes. It would be like selling a defective product, knowing it is defective and not telling the buyer about the defect. I suppose someone could argue caveat emptor, but if that attitude was prevalent in the stock market, I personally believe the damage to the equity capital markets would be enormous.

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Does it hurt anything else?

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I'm not sure what "anything else" includes. I believe it would discourage private investment into publicly traded companies. As soon as investors started thinking they were at a distinct information disadvantage they would never want to buy a stock again, IMO.

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2) US Senators and Congressmen are exempt from insider trading regulations even though they pass laws affecting companies.

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From what I've read this is technically not accurate. It depends on how you define "inside" information.

Congressmen and their staffers know what is in a appropriation bill, for example, which will affect a company's stock. But that information is not "inside information" from inside the company. The information is supposedly "public" since appropriation hearings are public.

If congressmen receive information from a corporate insider and they buy or sell based on that inside information, the congressman can be prosecuted under insider trading laws just like anyone else.

But I agree with your point, that congress has an advantage over the average investor just because of the information that person receives just from being a congressman.

My solution would be congressman must publicly announce at least 5 business days in advance what stocks he is going to buy or sell before he actually buys or sells it. The announcement should be published online.

I predict we won't see a law requiring that....