But insider trading isn’t comparable to larceny whatsoever. There is no definitive victim. Yes, in some sense the market is “less fair”. But the purpose of insider trading law isn’t to create a level playing field. It’s perfectly legal for a well-funded hedge fund to fly helicopters over an oil refinery with infrared cameras, so they can know ahead before a public announcement how much revenue the company is doing.
Rather, all insider trading requires the breach of fiduciary duty somewhere in the chain. The “victim” aren’t mom and pop investors, but the company itself. The idea being that the insider who leaks the information is misappropriating his fiduciary duty in a way that’s not in the direct interest of the company.
But in this case the damage to the company is far less than the amount of profits the perpetrator gains. Ask yourself, where if you owned a company would you rather have $100 million in cash embezzled or have an employee make $100 million off well-timed stock trades with unrelated third parties?
The damage to the victim only occurs in the sense that adverse selection in the form of insider trading dampens liquidity in the secondary market for company’s shares. Theoretically this decrease in liquidity should hurt the company’s valuation by making shares trade at an illiquidity discount.
In practice, given how extremely liquid and efficient modern stock markets are, the impact of a few million in insider trading is a rounding error. The vast majority of HFTs and stat arb funds that provide liquidity don’t hold anywhere long enough to where insider trading would make a significant difference. Most stocks trade thick at a minimum penny tick anyway. (Logically we should only prosecute insider trading when stocks are priced over $100.) And the evidence is scant that less liquid stocks even trade at a discount, after controlling for size and industry.
If we’re actually punishing crime based on the damage to the victim, then insider trading is almost certainly only pennies on the headline number.
My point isn't insider trading in particular but white collar crime in general. Even with your example, why not just make insider trading legal then, if there is no victim per se? Presumably the entire reason it's illegal, in addition to what you said, is because the existence of insiders trading would make the entire stock market itself no longer something where laypeople can confidently say is fair in the sense that risk-adjusted publicly-informed trades are optimal. Presumably said laypeople would exit the stock market after losing confident of it, resulting is less liquidity.
It's like pump and dumps, where the dumps aren't technically making victims of anyone as it's not like they've necessarily realized any loses. Regardless, money is being extracted from the so-called victims one way or another.
It's more comparable to people taking a shortcut down a switchback or through a garden. If a few people do it, no big deal, if everyone does it the whole thing falls apart. When I hear about insider trading I don't care one way or the other about the people who did it- but I do lose some faith in the market.
Given that markets are supposed to be information aggregators, it would actually be fairer if insider trading was allowed. Of course, as with all things, the profit would be much less if it were.
Rather, all insider trading requires the breach of fiduciary duty somewhere in the chain. The “victim” aren’t mom and pop investors, but the company itself. The idea being that the insider who leaks the information is misappropriating his fiduciary duty in a way that’s not in the direct interest of the company.
But in this case the damage to the company is far less than the amount of profits the perpetrator gains. Ask yourself, where if you owned a company would you rather have $100 million in cash embezzled or have an employee make $100 million off well-timed stock trades with unrelated third parties?
The damage to the victim only occurs in the sense that adverse selection in the form of insider trading dampens liquidity in the secondary market for company’s shares. Theoretically this decrease in liquidity should hurt the company’s valuation by making shares trade at an illiquidity discount.
In practice, given how extremely liquid and efficient modern stock markets are, the impact of a few million in insider trading is a rounding error. The vast majority of HFTs and stat arb funds that provide liquidity don’t hold anywhere long enough to where insider trading would make a significant difference. Most stocks trade thick at a minimum penny tick anyway. (Logically we should only prosecute insider trading when stocks are priced over $100.) And the evidence is scant that less liquid stocks even trade at a discount, after controlling for size and industry.
If we’re actually punishing crime based on the damage to the victim, then insider trading is almost certainly only pennies on the headline number.
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