Here are the Victims of Insider Trading, Hope I Didn’t Keep You Waiting Too Long…

We’ve officially gotten to the “actually insider trading is kind of fine” stage of the universe…

Opinion | Show me the victims of insider trading. I’ll wait.

Opinion | Show me the victims of insider trading. I’ll wait.

Meanwhile, take an honest look at the ways the institutions you belong to manage to hoard the best benefits for people like you.

Source: www.washingtonpost.com/blogs/post-partisan/wp/2018/08/09/show-me-the-victims-of-insider-trading-ill-wait/?utm_term=.925f3877db7b

Spoiler alert: it’s not fine, and here’s why:

Here are the Victims of Insider Trading, Hope I Didn’t Keep You Waiting Too Long

Here are the Victims of Insider Trading, Hope I Didn’t Keep You Waiting Too Long

The way 2018 is going, it should not shock you too much that we’ve gotten to the “a little insider trading never hurt anyone” phase of the…

Source: medium.com/@jodiecongirl/here-are-the-victims-of-insider-trading-hope-i-didnt-keep-you-waiting-too-long-d793ea8f18d5

Since I’m guessing that I have a more knowledgeable than average audience here, I’ll elaborate on one point from the original article that is basically correct. Technically speaking, the efficient markets hypothesis (EMH) comes in three flavors:

  • weak form: can’t systematically profit using past price information
  • semi-strong form: can’t systematically profit using public information
  • strong form: can’t systematically profit using even material nonpublic information

Not surprisingly, the strong form of the EMH can’t really hold without substantial insider trading in a market, so in a very specific way insider trading can make markets satisfy a stronger form of efficiency. That said, this observation once again highlights the fact that there is generally a tension rather than a correspondence between efficiency and fairness. In addition, these definitions of efficiency don’t take into account the potential inefficiencies generated by asymmetric information, which we generally put under the heading of market failure.

Oh, wait, one other thing…while McArdle is correct in that random people probably shouldn’t try to pick individual stocks, she leaves out that many people absolutely *should* hold a diversified portfolio that includes stocks (generally via index funds or other low-fee products). Unfortunately, the insider/outsider divide isn’t between individual and professional investors, and there’s no reason to think that asset managers and the like wouldn’t also find themselves on the losing end of insider trading, so “don’t hold individual stocks” isn’t really relevant to the discussion at hand or a solution to the insider trader problem.

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