Was just watching the Kudlow report , one of the few shows I enjoy because he actually let's guests debate instead of dominating them aka Glenn beck or oriley or cramer. Anyway he had a guest who argued that insider trading actually helps the small investor. His argument was that we live in an information age and blocking insider trading blocks information from reaching the market in the fatest possible speed. He says insider helps the small investor because if its good news then they will know the company is good and if its bad it will lower the price for future investors. He said he cannot think of one case where it hurts investors. How about investors who are in the trade and get hurt because bad news comes out that they should have been made known to the public. Deceiving the public about the health of the company I'm honestly shocked
For me, that's always been the whole point of technical analysis. You get signals that something is happening long before the news comes out. Still, insider trading as defined in the statutes is a crime. It's separate and distinct from an inside person selling within the defined parameters of when they are allowed to do so based on observation and knowledge of the workings of the company. What the statutes define as insider trading is someone knowing, for instance, about an imminent deal as a result of his job and trading on that knowledge. Such a person needs to be jailed. For the purposes of T/A, such a person is not necessary: all that's necessary is inside folks who have everyday knowledge of the company and buy or sell based on that knowledge. Thieves aren't necessary to the workings of T/A, which may have been this person's argument.
I agree but that's not the point there are a lot of small investors who don't know about ta and get burned on insider information
Do small investors get burned any less if rather than a more gradual price change as info leaks, the price gaps down huge on a public announcement? It actually makes very little difference to the individual investor.
The investor will never be able to react fast enough to bad news. In fact, he makes a valid argument ethics aside. Inside information usually creates warnings signs that actually could alert an investor "before" the bad news actually hits the tape as the above poster stated using TA. For example for years, many people have used insider buying and insider selling (legally) to make investment decisions. This is kind of inside information light. It draws attention to investors. The bottom line is, the guest is right, inside information actually in a twisted way gives the investor a shot at making money. Because no one can react to news after the fact. The bad news comes out, stock drops 50% and the investor sells the lows. And if you are going to argue that the insider is going to dramatically move the stock down against the investor, I would have to disagree. Unless it's a very illiquid stock. It's an interesting comment to make. Of course the ethics of it are not good and it does damage the integrity of the market. But I would say it probably helps more then hurts investors.
Please, everyone, note that I did say you could get the T/A signals from legal insider selling. The signals that would come from the illegal kind would be stronger, of course, but if you let that run really rampant it would probably kill the markets eventually. Or what Maverick74 said about the integrity of the markets.
But if insider trading were legal, everyone would do it. Board Members, execs, management, their families, their friends, their brokers, then their clients, then rumors. In effect, the inside information would adversely move the market before the news broke negating full and fair disclosure to 'outside' participants.
This Article briefly reexamines the great debates on the role of insider trading in the corporate system from the perspectives of efficiency of capital markets, harm to individual investors, and executive compensation. The focus is on the mystery of why trading by all kinds of insiders as well as knowledgeable outsiders was studiously ignored by the business and investment communities before the advent of insider trading regulation. It is hardly conceivable that officers, directors, and controlling shareholders would have remained totally silent in the face of widespread insider trading if they had seen the practice as being harmful to the company, to themselves, or to investors. By analogy with the famous article by Friedrich Hayek, The Use of Knowledge in Society, this Article considers the problem of obtaining necessary information for managers of large corporate enterprises. The suggested analytical framework views the share price, sensitively impacted by informed trading, as a mechanism for timely transmission of valuable information to top managers and large shareholders. Informed trading in the stock market is also compared to prediction or virtual markets currently used by corporations and policymakers. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=679662