Insider trading

What is the Objectivist/Solo forum view on insider trading?

I am thinking of the situation where a person comes into possession of price-sensitive information about a company's shares, and buys/sells based on this information.

My own intuitive response would be that whilst there is at first sight no 'victim', there is likely to be some kind of breach of trust involved here, as the insider trader is likely to have only come across this info as a result of their employment/directorship etc.

However, just to complicate things, what if the insider trader happens to find the info lying in the street, having been accidentally dropped from a passing executive's briefcase?

I have my own views on this but would be very interested to hear what others think.

Post 1

Friday, June 6, 2003 - 5:58am

What sort of breach of trust are you talking about, Jonathan? A person should put himself first, and if he knows that his investment will soon become worthless then he owes it to himself to salvage what he can. I don't think it's any different from starting a job hunt as soon as I hear that my employer is likely to go out of business.

Post 2

Friday, June 6, 2003 - 4:33pm

>> What sort of breach of trust are you talking about, Jonathan?

Here's the key phrase: '...as the insider trader is likely to have only come across this info as a result of their employment/directorship etc.'

In other words, in most cases, insider trading is only possible via the misuse of information held by virtue of a position of trust, eg an employment relationship.

Here is a real-life example. I used to work for a large accountancy firm, and also often dabbled in shares. One of my colleagues received a fax which had been sent to the wrong fax machine internally. It contained information about an imminent takeover. My firm was acting for one of the parties involved. If I had acted on that information, I could have made an instant 19% profit when the takeover news became public the next day. But this would have been (in my view) a breach of the trust my employer had placed in me to handle confidential client information.

Hope this makes my question cleaer.

Post 3

Friday, June 6, 2003 - 4:38pm

PS In reply to your comment 'I don't think it's any different from starting a job hunt as soon as I hear that my employer is likely to go out of business.'

I think the crucial difference here is that it is not part of your job to receive such information and then to keep it confidential. If you are an accountant/stockbroker/merchant banker/whatever then this is part of the contractual deal you sign up to both with your employer and with clients. Obviously this does not cover my 'papers lost in the street' scenario though.

All comments here welcomed.

Post 4

Tuesday, June 10, 2003 - 10:23am

I think that there were two seperate issues here. I don't believe in insider trading *laws*, since they prohibit two parties from voluntarily exchanging their property with one another.

On the other hand, it's fine for a company and an accounting firm to agree that the accounting firm may purchase the company's stock only in certain circumstances. And, in turn, it's fine for the company to hold its employess to these rules as a condition of employment.

And I suppose it's even okay for a stock exchange, as a private organization, to decide to only deal with companies and brokers who agree to certain insider trading rules.

In these cases, breaking the rules should be treated as breach of contract--not as a criminal offence, as is the case today. Whether or not these rules are actually beneficial is a totally seperate question.

Post 5

Friday, June 27, 2003 - 6:57am

"I don't believe in insider trading *laws*, since they prohibit two parties from voluntarily exchanging their property with one another."

I think these laws are put in place to stop the manipulation of markets. Sure, it would be wonderful if you were the person making a quick buck, but the inherent nature of a person to look out only for oneself, not the far reaching effects of his actions as a whole are wrong. Profit comes not only from the buy of stock at the bargain price, but the sell of the stock once the news hits the general public. Imagine if your retirement fund consisted mainly of shares that were climbing daily when you purchased them after big news on the market, only to find sometime thereafter that a huge sum of shareholders had made their money and dumped their discarded shares back on the market, driving down the total value of what you had researched and bought legally. What then? Would you simply smile and say, 'I sure wish I was on the inside' or believe that you needed to be on the inside to actually succeed in the market. I don't think it is a restriction of exchanging properties as they see fit. I belive it is a safeguard against the greater evil of market manipulation. Equal advantage would be the monicker of the laws.

Post 6

Friday, June 27, 2003 - 8:06am