Oct

24

In his WSJ article this weekend, Prof. Boudreaux argues that insider trading shouldn't be illegal, as price-movement from such trading transmits better information about company value to the public. Presumably this also extends to legalizing burglary, as burglars perform valuable tests on home penetrability of use to homeowners not yet foreclosed on.

Relatedly, one thought the currently unfolding grand experiment in US socialism would have been considered bad for free-markets and the securities used to capitalize on them. Current and planned government control, confiscation, and regulation appears to be the biggest since the New Deal (bigger not adjusting for inflation). To put a little lip-gloss on this porcine, here is comparison between SP500 (via tradeable SPY, including dividends) weekly returns under Democrat and Republican presidencies since 1993 (Clinton + Obama so far, vs GWBush):

Two-sample T for DEM WK vs REP WK


.         N     Mean   StDev  SE Mean

DEM WK  457   0.0036  0.0228   0.0011  T=2.41 P=0.016

REP WK  415  -0.0005  0.0265   0.0013

Michael Moore would pop a suspender to learn that not only do stocks do better under recent Democrats, but ALL the positive returns since inception of SPY (Jan 1993) occurred under Clinton and Obama. Note, as is often the case, this happened with less volatility:

Test for Equal Variances: DEM WK, REP WK


95% Bonferroni confidence intervals for standard deviations

.          N      Lower  StDev   Upper

DEM WK   457  0.0212  0.022  0.024

REP WK   415  0.0246  0.026  0.028

F-Test (normal distribution)

Test statistic = 0.74, p-value = 0.002

How can this be? Shouldn't high taxes, government spending, socialized medicine, pay controls, huge deficits, and trading restrictions reduce profits and stock returns?

Then on this morning's run, the Homer Simpson (DUH) moment hit in the form of a question: Who does better as government deepens its grip on the means to production, and un-levels the playing field? Not the public - at least not mom and pop 401K. The smart people do better. The ones with the brains and resources to find loopholes in a byzantine regulatory and tax environment. Wall Street firms. Hedge funds. Large banks able to package off bad bets to taxpayers.

OK if that doesn't Liberate you, listen to this while thinking about who gets to pay for political bubble remediation:

Phil Collins: Another Day in Paradise

Springsteen/REM: Man on the moon

Alston Mabry replies:

I always thought it would be interesting to make insider trading legal, within a framework that included real-time reporting of trades made by those registered as "insiders". (And perhaps any employee of a company would be considered an insider.) Then the information contained in the trades would at least get transmitted to the markets quickly and overtly. You could extend it so this system would apply to any trades made by insiders in their industry.

Laurel Kenner notes:

The Loeb Award has been the most prestigious in financial journalism since it began in 1957. It's ironic that the founder's methods are now against the law…

Gerald Loeb, co-founder of E.F. Hutton, created the award to encourage methods that "inform and protect" individual investors. He himself relied almost exclusively on working his contacts for information. He would then publish the information for his clients. It's all there in his book, "The Battle for Investment Survival."

My goodness, how else are you supposed to get tradeable information? Are we all supposed to wait with our hands out for handouts? I guess that is the socialist model: handouts and no work.

Gordon Haave objects:

Legalize insider trading? Sure, in theory — but in reality nobody is going to play in a game where he feels his opponent has an edge on him. All you have to do to see how this works is to look at a place like Mexico [& many other emerging markets], where insider trading is rampant and blatant. The average person doesn't play.

Gregory Rehmke writes:

Some years ago Virginia Postrel argued that "insider trading" rules should be left to companies and to the various exchanges to decide. Exchanges will want to reassure investors and would fine members who broke the rules. I also think it is interesting that we only hear when "insider trades" make money. Such information is usually imperfect, so many trades based on this information lose.


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5 Comments so far

  1. Sean Lyng on October 24, 2009 9:20 pm

    "Shouldn't high taxes, government spending, socialized medicine, pay controls, huge deficits, and trading restrictions reduce profits and stock returns?"

    Who knew this was a political website!?

    Was it not Clinton who left with a balanced budget? Has socialized medicine been introduced and I wasn't aware? Pay controls you say? Or is it more a case of privatized profits and publicly shared losses? It's terribly simplistic and dangerously naive to suggest that it is a simple as a D vs. an R in the White House that could cause our current mess. Idiocy is a bipartisan trait of politicians (and central bankers perhaps).

    Aren't the statisticians in the audience going crazy at your small sample size (you're looking at 3 administrations and trying to draw conclusions…really?) I thought this website prided itself on its ability to "count" things — I guess we aren't counting very high these days!

  2. Rocky Humbert on October 25, 2009 7:47 am

    A legitimate doctrine behind insider trading statutes is that "inside information" belongs to the company and its shareholders — not the executives who leak it for personal gain. Forgetting about arguments regarding market efficiency, this doctrine correctly equates dissemination of inside information to be a form of embezzlement at worst (and unapproved compensation at best.) This doctrine also explains why insider trading statutes do not apply to the commodities markets.

    Laurel: The Co-founder of E.F. Hutton made his fortune by exploiting the churn of individual investor portfolios under the traditional broker guise of "adding value." It's an ironic truth that most of his clients would have been better served if instead of creating the Loeb Award, he would have created the retail Index Fund. (That didn't happen for another 25+ years.)

  3. Steve Leslie on October 25, 2009 11:42 pm

    Ok you legalize insider trading, thereby reducing or eliminating some government jobs at the SEC. You free up lawyers to litigate other areas. BAM another bureaucracy is downsized. I thought Democrats are in favor of bigger government. Actually what will happen is that those employees will be moved over to socialized health care departments to fight the battles there.

    Make all insiders show transparent real time records. Ah there is the solution. Now everyone will be forced to comply. Right? They will find some other way to cheat and hide their trades to gain an advantage. Offshore accounts, fictitious names, shell companies etc. It becomes one more game of cat and mouse. The criminals like Madoff and others will find other methods to fleece the masses.Some of the really smart guys will avoid detenction for years perhaps for ever. Government agencies lawyers and accountants will always remain a few steps behind the "evil geniuses" That is just the way it is. They are like those who wish to fix the holes in the dyke by putting their thumb into it. Another hole will emergy As Don Henley sang " and lawyers dwell on small details."

    What about misinformation? there was a time when the WSJ heard on the Street column was used as a pawn of big power players. TV channels use Dan Dorfman Jim Cramer and others to report things creating scams. Prosecute those scoundrels. This will eliminate this technique. What happens next. The executives develop other ways to scam the underinformed with creative and complicated accounting methods. Hello McFly ever heard of Enron, Tyco, World Com Imclone. Of course none of this exists today does it.

    Here is an idea framed by professional baseball. Just let everybody cheat. Turn a blind eye. Let everybody use drugs, steroids et. al. Let an ignorant public buy into it for about 15 years. Build up astronomic profits and wealth.Save a sport. Deny Deny Deny. Then go to a blame game and say "We want to do something about it but the players union is against it." Bud Selig. Show some superficial effort to take steroids out of the game. Promise to rid the sport of all forms of banned substances that enhance performance.Form a Mitchell Report. Hold hearings on TV. Selectively admit that there is a problem What happens? Science develops other drugs. HGH blood doping undetectable drugs that have no current techniques to detect them. How else does BArry Bonds head grow in size and mass over 15 years. In between he amasses remarkable wealth. As does Roger Clemens, Rafael Palmeiro, Mark McGwire, many many others. What happens is the public forgets what all the arguing was about in the first place and moves on to the next scandal du jour. Meanwhile attendance records go into the stratosphere. The Yankees get a multi billion dollar stadium. Memorabilia sales explode. TV contracts are negotiated. The Yankees make it back to the World Series. All is well in the world.

    "And the beat goes on." Sonny Bono.

  4. Steve Leslie on October 26, 2009 4:30 am

    I am so delighted that Ms Kenner weighs in on her thoughts. As I have said over the years, she does not do this nearly enough for my tastes. Her mastery of knowledge and wordsmithing is so refreshing.

    That said, I find it interesting to note the philanthropy of so many rich people and their backgrounds.

    John D. Rockefeller perhaps the worlds richest man ever destroyed many a mans dream of accumulating wealth in retail gasoline and at one point in his life would hand out Roosevelt dimes to children. It was only very late on in his life that he decided to give away real money.

    Bill Gates has the largest foundation in the world yet his company is in court every day being sued for unfair business practices and his other attempts to destroy any software company that gets in their way. Note the feud with Sun Microsystems and others.

    Joe Kennedy, noted bootlegger, securities fraud and exploitation, sets up legacy with very dirty money so his children can enter politics and not have to have a real job their whole lives. Ted Kennedy the lion of the Senate protector of the downtrodden. Check out how much in taxes he ever paid through his exploitation of offshore trusts. the Kopechne family hardly fans of his.

    Sam Walton. This company ruined hundreds and thousands of small businesses on the way to a global behemoth in retail. Oh don't forget their unofficial stand against establishment against unions so they can control wages in a community.

    Ted Turner hardly a fan of Dale Carnegie or Roman Catholics for that matter. Gives away a billion to the U.N.

    George Soros amasses billions and then sets up complicated trusts to not pay hardly any U.Sm taxes then funds such enterprises as move on .org to destroy the Republican party and any republican who decides to run for office.

    Phil Knight donates millions to U. of Oregon sports and uses Asian factories to manufacture Air Jordans for dollars to sell in the U.S. for hundreds of dollars.

    Summary. So many of these revered and so called noted philanthropists become generous and philanthropic only after they secured for themselves and their posterity so much wealth that it would be statistically impossible to spend it all on their own. And Damn the Torpedoes and woe to those who get in their way on their own "March through Georgia." and on to the top. It seems as though rules apply only to the small man and woman. Certainly not to them. Let the wall street lawyers on Park Avenue handle the rest.

  5. douglas roberts dimick on October 30, 2009 12:20 am

    Politics Inside Out

    KZ, if you care to examine what happens when insider trading is legal, study China. Here the two biggest insider traders are the government and communist party.

    Chinese stock markets ranked last in the world for 2008.

    dr

    Ps. Concur on PC with Paradise. As a scarecrow from a small town, I offer scores of John Mellencamp over Boss for social-economic correlations.

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