subzero1

Wrong, the stock market certainly existed and functioned before the enactment of insider trading laws. That's a historical fact.

Also, saying that it will disappear is an argument of utility, that's not an ethical argument.

I concede that insider trading is a rule and sets certain expectations, and I think your argument is spot on from that standpoint. If we all agree to the rules of the game, then we should all abide by those rules. To do otherwise is cheating, as you elegantly note.

But as a topic of conversation, I'm actually much more interested in talking about insider trading and it's ethical standing if those rules had not yet been enacted, and/or whether they should be repealed. You touched on it briefly in your last post, but I would love to hear more of your thoughts on the matter.

Professional rabble rouser.

Well, seeing as how I asked to set aside legality and focus on the point from an ethics basis, I don't see how talking about LAW is relevant in any way to our discussion now. I absolutely concede that insider trading is illegal. My question is whether it's WRONG, and if so, why is it wrong, specifically, what part of the MORAL code does it violate?

Now, if you posit the egalitarian ethics, then tie the fact that the information playing field is not level, therefore it's an ethical violation and morally wrong, that would be a fruitful line of inquiry.

I'd argue against egalitarianism, as simply a systematization of envy, and we could pursue that. But saying it's wrong because it's 'stealing' or 'cheating', then not defining exactly how it's stealing or cheating is pretty weak.

Let me retract that a bit. I can see how you have tried to tie it back to the concept of stealing, but it is based upon the idea of egalitarian distribution of information. I would answer that egalitarianism is the incorrect moral code and we could argue that

Define 'anti-predatory'. Are you saying it's fraud? If so, how exactly is it fraud? See the example of real fraud given by Aquinas and quoted above. That's fraud. But insider trading doesn't really fit. So it's not fraud.

So what exactly makes insider trading wrong?

My feeling is that the argument against it is pretty strongly related to the egalitarian view of justice. It is the idea that no one should have a real advantage over anyone else, and is at the root of the death tax and the progressive tax system. We can't raise up the poor or the 'dis-advantaged', but we sure as hell can destroy the rich or 'advantaged'.

Everyone hates the rich and 'advantaged', so I guess that justifies targeting them for being 'predatory' and tossing them in jail, or at least justifies taking their money away from them, which they probably didn't 'deserve' anyway, right?

If you sell a car and hide a defect to deceive another and cause him to pay a higher price, you have stolen from him. That is precisely what trading on insider information is.

That's simply a wrong analogy, sorry. A better analogy would be to say that if I work for Porsche and I know that the 911 is about to be discontinued, I can go out and buy a bunch of 911's, knowing that the future scarcity will likely drive the price up. Are you saying that is immoral? Clearly I have information that the sellers do not, so should I tell them that they should not sell?

Here is a more rigorous treatment of the ethical position I take with regard to insider trading. I did not write this paper, but it is amazing how similar his thoughts are to mine:

ETHICAL ISSUES IN INSIDER TRADING: CASE STUDIES

Robert W. McGee

Barry University

Revised August 20, 2004

Published in the Proceedings of the Global Conference on Business Economics, Association for

Business and Economics Research, Amsterdam, July 9-11, 2004, pp. 712-721.

ABSTRACT

Insider trading has received a bad name in recent decades. The popular press makes it

sound like an evil practice where those who engage in it are totally devoid of ethical

principles. Yet not all insider trading is illegal and some studies have concluded that

certain kinds of insider trading are actually beneficial to the greater investment

community. Some scholars in philosophy, law and economics have disputed whether

insider trading should be punished at all while others assert that it should be illegal in all

cases. Appeals often tend to be based on emotion rather than logic and academic

analysis. This paper reviews the literature on insider trading and applies utilitarian

ethics and rights theory to some recent case studies of insider trading in an attempt to

determine which forms of insider trading are ethically acceptable.

INTRODUCTION

Practically all the articles that have been written on insider trading in recent years have treated it

as something evil. The notable exception is the work of Henry G. Manne. [51] [52] [53] [54] [55] [56]

[57] [58] [59] [60] [61] For two particularly hostile and vociferous attacks on Manne's position, see

Hetherington [39] and Schotland [88]. Whenever the term "insider trading" is used, the average

2

listener/reader immediately classifies it as a bad practice, or something that is immoral or unethical.

Inside traders are viewed as common criminals. [65] The purpose of this paper is to explore the nature

of insider trading and analyze the issues to determine the positive and negative aspects of insider

trading, and how policy should be changed, if at all.

Before proceeding any further, a definition of justice would be appropriate. Once "justice" is

defined, the definition can be applied to the practice of insider trading to determine whether the practice

is just. A just act can be between individuals or between the State and one or more individuals although,

in the final analysis, an act involving the State is carried out by an individual. According to one popular

theory, justice is the absence of coercion. Acts between consenting adults are just. Individuals or

governments that prevent such acts are acting unjustly, and individuals who commit acts that aggress

against others, except in self-defense, are acting unjustly. Robert Nozick's [70] and Murray N.

Rothbard's [84] definitions are along the same lines, but John Rawls' [79] is not. Brian Barry [7] and

Otto Bird [11] have also expressed views on this point. Perhaps the most detailed bibliography on the

theory of justice, at least for books first published before 1900, is in The Great Ideas: A Syntopicon,

[37].

A corollary to this view is that the proper scope of government is to protect life, liberty and

property, and any act by government that goes beyond this scope results in injustice because it must

necessarily use coercion to take from some to give to others. A similar view is taken by John Locke in

his The Second Treatise on Civil Government [47] and at least some of America's founding fathers. The

view is also developed by Robert Nozick [70], Richard A. Epstein [29], Frederic Bastiat [9], and Dean

3

Russell [86]. Space does not permit a detailed defense of this position, but others have already

discussed this point thoroughly anyway [9][29][70][86].

If injustice results when one individual takes the property of another without that person's

consent, and the proper scope of government includes prevention of such acts, then government should

attempt to prevent coercive (or fraudulent) takings and should refrain from interfering in nonfraudulent

transactions that are between consenting adults. In the case of insider trading, the Securities and

Exchange Commission might be the proper agency of government to prevent such transactions, if

insider trading is deemed to be an unjust act. However, at least one former SEC Commissioner has

pointed out the potential abuses that can occur when the SEC is given such regulatory authority. [43]

Perhaps regular common law contract and tort would be sufficient to protect individuals from harm.

Using existing law to protect against violations of property and contract and to prevent fraud might

provide a better solution than using insider trading laws that are vague and that may result in punishing

individuals who have committed no offenses against property or contract rights.

Whether insider trading is fraudulent is questionable. St. Admin Aquinas said that fraud can be

perpetrated in three ways, either by selling one thing for another or by giving the wrong quality or

quantity. [22, p. 105] [4] A more modern definition is "intentional deception to cause a person to give

up property or some lawful right." [94].

A typical case of insider trading occurs when a buyer with inside information calls his stock

broker and tells him to buy, knowing that the stock price is likely to rise as soon as the inside

information becomes public. In this case, the buyer does not deceive the seller into giving up property.

Indeed, the buyer does not even know who the seller is, and the seller would have sold anyway,

4

anonymously, through the same broker. The seller's action would have been the same whether an inside

trader was the other party to the transaction or not. If the inside trader had not purchased the stock,

someone else would have. Yet this "someone else" would not be accused of reaping unjust profits, even

if the identical stock was purchased for the same price the insider would have paid.

Insider trading does not seem to fit the definition of fraud, so there does not seem to be

anything fraudulent about it. Furthermore, according to Aquinas, there is no moral duty to inform a

potential buyer that the price of the good you are trying to sell is likely to change in the near future.

[4][6, p. 420] [8, pp. 359-360].

In the case Aquinas discusses, a wheat merchant

"...carries wheat to a place where wheat fetches a high price, knowing that many will

come after him carrying wheat...if the buyers knew this they would give a lower price.

But...the seller need not give the buyer this information...the seller, since he sells his

goods at the price actually offered him, does not seem to act contrary to justice through

not stating what is going to happen. If however he were to do so, or if he lowered his

price, it would be exceedingly virtuous on his part: although he does not seem to be

bound to do this as a debt of justice." [4]

Based on this view, an insider who knows the stock price is likely to rise in the near future has

no moral duty to inform potential buyers of this fact. Where there is no moral duty, certainly there

5

should be no legal duty either. In fact, the Supreme Court has ruled at least twice that those in

possession of nonpublic information do not have a general duty to disclose the information to the

marketplace [19] [24]. Jonathan R. Macey has also spoken on this point [49].

WHO IS HARMED BY INSIDER TRADING?

While the transaction of buying and selling stock by an insider does not meet either the

dictionary's or Aquinas' definition of fraud, the question of justice still remains. If no one is harmed, the

act is not unjust; if someone who does not deserve to be harmed is harmed, the act is unjust. The

obvious question to raise is: "Who is harmed by insider trading?"

The most obvious potential "victims" of insider trading are the potential sellers who sell their

stock anonymously to an inside trader. But as was mentioned above, they would have sold anyway, so

whether the inside trader buys from them or not does not affect the proceeds they receive from the

sale. If the sellers are hurt by having an inside trader in the market, it is difficult to measure the damage,

and it appears that there is no damage. In fact, the academic literature recognizes that insider trading

does not result in any harm to any identifiable group [60] and those who sell to inside traders may

actually be helped rather than harmed because they received a better price, so it appears illogical to

allow them to sue for damages if, in fact, there are no damages. [17][28][68] From the perspective of

utilitarian ethics [21][36][90], buyers are no worse off as a result of having purchased from an insider

than they would have been if they had purchased from a noninsiders. Thus, there is nothing wrong with

the practice from the perspective of utilitarian ethics. Of course, utilitarian ethics has been criticized for

having certain structural flaws [34][64][85], but time and space do not permit an adequate analysis of

6

those arguments. Furthermore, the main problem with utilitarian analyses

But that's the whole point, I don't concede that it's 'wrong'. Doing something immoral is wrong, but I don't see how this is wrong, particularly in context of my last post. If someone can show me exactly how/why it's wrong, I'm more than happy to change my opinion. But claiming 'unfair advantage' as a basis for a moral argument is ridiculous. That's like me saying that Kobe Bryant has an unfair advantage over me in Basketball, so it is immoral for him to play me in a game of basketball. Stupid thinking for basketball, stupid thinking for stocks.

The argument seems to be that people own stock at a certain price ($1) are somehow 'cheated' if I come in and buy some of it. But the fact is that they are perfectly happy selling for $1, otherwise they would not have offered it at that price. They agree to sell it for $1, and I agree to buy it for $1. Where is the crime there?

My 'knowledge' may (or may not) help me in the future, but the fact is that the transaction for $1 is not based on fraud, it is a free trade where both sides know exactly what is being sold and bought, and for what price. Now, the stock may go up in the future, but then again it may not. That's a risk. And the more money I put up based on my 'knowledge', the greater my financial risk.

The fact is that the seller is selling, and someone is going to buy. Whether that someone is me, or a different person is irrelevant, since in no way will the seller ever see the future profits, since they sold the stock for $1. The buyer is the benefactor. So if I have a 'hunch' or a 'tip', why should I not act on it? These 'tips' aren't always accurate, and they don't always work out the way you think they will, so there's still a level of uncertainty and risk involved.

I mean, take the reverse, and I'm the seller, selling for $1. 2 days after I sell, I see it go to $5. If the person buying it from me had more info that I did, am I able to cry 'foul' and whine 'But you should have told me not to sell it!'. That's ridiculous. A disparity of knowledge (or skills, or whatever) is the very foundation of all business.

Let's take another example - say I know that the cost of producing baseballs is going to increase 100%, causing the price to double to consumers. So I go out and buy a bunch of baseballs at their current price, hold them for a few weeks, then turn around and sell them at the higher price. That's perfectly legitimate, and I don't see why stocks would be any different than baseballs.

No one has really answered my questions. I understand that it's illegal, so a bad idea to break the law. But I don't really see how it's 'wrong' (putting legality aside).

Let me clarify, that I'm not advocating that managers or other people in positions of power should be able to insider trade, because they have the power to manipulate the performance of the company to cash in. Kind of like not allowing an athlete to bet on their own games. But if you were, say a person that knew the star player had an injury which no one else knew, why not use that information?

Well, but before you buy 10000 shares for $1, someone else already owns them, don't they? So you are not 'taking' money from the buyers at $4, but rather you are making the $3/share profit from the people selling, not from the people buying.

Of course the people selling don't have to sell, since they own the shares and can sell, or not. If they held for a bit longer, then they would be making the profit when the price rose. In either case, it's either you, or the original holder of the stocks that stands to make the profit, and the buyer at $4/share would not make a profit regardless of whether you bought the stock at $1, or at $4.

Again, I don't see the problem. How is that stealing?

OK, so maybe this is a naive question, but what exactly makes acting on a tip like this wrong? I mean, I can see insider trading being wrong if you are in a position to manipulate company performance in order to cash in on stock holdings, but if someone simply happens to come into information that is legitimate, why not act on it?

Today I am wearing my new customized 177h from DSN with an MP5 waterproof strap, and chieftang double AR:

Thanks all. That's one thing I've decided is very cool about the rep world, you have more freedom to make things look exactly the way that you want. With gens it's just too pricey to mod the watches in any significant way.

So, had a DSN 082 that I never wore. I mean it looked cool and all, but the blue dial somehow didn't every fit with what I was wearing or my mood, so it sat in the watch box almost always. So much so, that I was on the verge of just selling it. But, I decided to see if I could salvage something from it instead.

I had an old 111H black dial from another DSN watch, with pretty wide and shallow cutouts for the numbers. It really is not accurate for current PAMS (which is why I swapped it out of my 111H a while back). But I always liked how bold and 'old school' it looked. So in it went. And I kept the black subdial seconds hand from the 082, which combined with the black dial and black hour and minute hands really makes the watch very rugged and military looking. Of course, crystal has double AR coating from chieftang. I think it looks great, a perfect look for old-style panerai:

New Chopard, w/upgraded rubber strap (dust repellent!):

DSN 183 w/K2222 double AR and Europelli bourdeaux cordovan leather:

Today was my new 'ultimate' chopard:

Tomorrow will be the Porsche Flat 6:

082 w/chief double AR:

I can respect the love others feel for this watch, but I find it kinda bland, particularly compared to the HBB, new Chopard, and upcoming Concord C1.

Big pilot project abandoned.

Finally a version that can compete with the classic DuPre/Barbirolli version:

dludley, that aquanaut is HOT

An oldie but still a goodie for me - PAM 113 w/chieftang double AR:

The Porsche Flat 6, the Graham Chronofighter, the HBB, the new Chopard, all have really excellent straps. The quality of rubber strap on these watches is miles and miles better than what was available before.