Also, when you trade you expect the value of a security to go up in the future. When it is in the news you have an observation of an event of t-1 due to the fact that people have already written about it and others have taken actions already.
Legalize insider trading and make large trades go through very slowly while small trades go through in milliseconds.
This would allow common people with a few thousand dollars to act on news and make meaningful amounts of money, while hedgehog funds have to wait for their transaction to painfully slowly go through.
(Very) Large trades already go through slowly unless you’re buying/selling a high volume stock at market. Also when they say insiders already heard the news it’s more like days ahead, not hours.
If you own 100000 shares of AMZN, it should take an entire quarter for your trade to go through. You will lose money if there is bad news.
If you own 1 share of AMZN, it should take 1 ms. If you are a super well-networked intern and figured out the bad news, bravo, you just made a bunch of money.
That would cause an fake increase of stock price temporary keeping it artificially higher. Meaning anyone buying would be paying more than the actual value. The next thought would be wouldn't the market correct for this? It doesn't know if I'm going to sell 100,000 at once or 1,000 shares daily for 100 days.
I was thinking that if you possess a lot of shares, your orders are all forced to go through with a several-day (even -month) delay, regardless of the size of your trade.
Would need to get rid of dark pools, or at least completely open up their visibility. (should be more transparent anyways)
And would need a way to backwards-track trades to make sure a single entity isn't placing millions of small trades...which would also require individual verifiable identities being linked to each trade.
Why would you want 100 people to have wealth instead of just one? I feel there's some related questions about utility being non-linear that matter here
No, because you can make the same argument against any improvement in efficiency and productivity. It's like arguing against division of labor or automation in a factory because less people will be employed by the factory. It's anti-prosperity.
You joke, but there are serious economists suggesting that we _should_ in fact legalize insider trading. (Though your employment contract might still forbid you.)
In any case, your suggestion wouldn't really work: the insider who would benefit would mostly be high up managers, not anymore 'real people' than the (relative) corporate outsiders who run the hedge funds and vulture funds etc.
Second, who would the retail traders trade with on those news? Market makers would go on to quote huge spreads, or not trade at all. Those institutional investors you want to hobble ain't so stupid. (And those that are, wouldn't last long.)
I actually am not joking; I don't think access to information should be discriminated upon.
If you have better access to information, because of a leak, you are better fit, better networked, and should be rewarded for it.
At the same time, those high up managers would probably be trading millions of dollars worth of shares -- their trades should go through slowly, and that is a mechanism that would prevent them from benefitting from it.
The person who benefits the most, percentage-wise, will be the dude who sweeps the floors at Amazon and sniffed the bad news based on, say, the times that people were coming in and out of work. Or the intern who found a huge security vulnerability and shorted the stock before disclosing it. These people should be rewarded. These people will get a few months' worth of rent while the millionaire just gets an additional Michelin one-star dinner, at best. And the billionaire CEO who owns a shitton of shares will lose money because he has enough shares that his trades will be delayed by an entire quarter.
OK, those economists are also not joking. Though they have different reasons to allow insider trading. Mostly to make markets more efficient by making them incorporate more information. In the end, that's good for productivity.
In any case: you can remove the laws that make insider trading various shades of illegal in various countries around the globe. However, companies would very likely still insert clauses in their employment contracts that forbid insider trading. (And have you eg forfeit any profits you make to the company plus a hefty extra penalty on top.)
If you wanted to get to the situation you describe, you'd have to make a law that makes these kinds of clauses unenforceable. That's probably pretty hard to get right, if you still want companies to be able to protect trade secrets with contracts.
How are you planning to make big trades go slow? I mean, mechanically? And, as I asked earlier, who do you think would be the willing counterparties for those retail trades when you make the life of market makers harder?
> How are you planning to make big trades go slow? I mean, mechanically?
Sure, why not? I mean, impose either on a broker-level or on an exchange-level that if an account which holds 100K shares of X makes a trade of X, it will be 3 months between clicking "place order" and when that trade actually gets put into the order book. But if an account that holds 1 share of X makes a trade of X, it goes into the order book as soon as they click the "place order" button.
Optionally, also make the order book publicly visible and anonymized.
Optionally, also make pending delayed orders to go into the order book publicly visible and anonymized as well.
Your restrictions wouldn't really work on the broker level: people would just shop around to get a different broker, or just connect to the exchanges directly. (After all, that's what brokers do.)
You'd also have to apply the same treatment to all derivatives. Especially in-kind settled futures.
You'd also need to take dark pools and internalisers into account, ie people trading outside of the exchanges.
You'd also need extra rules that would prevent people from splitting their portfolio over multiple accounts.
How would you deal with eg indexing mutual funds that are held by retail investors? Presumably you want retail investors to be able to trade as fast as before, and I also assume that you don't want to force retail investors to do all their investing in individual stocks. Now, if money is flowing into a index fund, should they be allowed to buy more stocks?
I specifically picked indexing funds here, because they don't trade because of any information they got: they just want to mechanically hold the index. I also specifically picked mutual funds, because ETFs typically don't _trade_ in the traditional sense when money comes in or goes out.
You'd also have to enforce your delay globally, as otherwise people will trade in other countries.
And, after you fixed all those issues, my question remains: who would trade with all those retail traders? Institutional trading on exchanges would largely cease.
> Also, when you trade you expect the value of a security to go up in the future.
Not necessarily. You can also trade on securities going down in value (via shorting). Or you can even just bet on eg volatility going up or down or staying the same. (Eg via some derivatives and options.)
Or you can bet on relative price movements of some security vs another.
You are right about financial prices being forward looking, and news being backwards looking. And: by the time you have heard of something in the news, the professionals and their computers will have already traded on it a million times over.
This mostly applies to deeply liquid markets. If you are trading rare Lego sets or Magic the Gathering cards, you might still benefit from news.
One of the main drivers of a stock price is the assumption of earnings. New product ? Slash cost? Higher taxes / interest? If it's a surprise, then the reaction can be quick. If it's quick its much more profitable or disastrous (depending on which side you are on).
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