Posts Tagged ‘Insider Trading’

Ethics of Insider Trading « The Business Ethics Blog

February 28, 2012

The fiduciary responsibility argument against insider trading is quite strong.

Pro-arguments focus on the increased information efficiency that should arise. Intuitively, information efficiency will increase, but Pareto efficiency will decrease depending upon how quickly the information is incorporated for everyone to act upon. Do most proponents for legal insider trading assume the informational efficiency is the better good because the process is  instantaneous enough to get us closest to the desired Pareto efficiency? What about Insider Trading that seeks to disguise what is happening and preventing the inside information from being incorporated into price?

If legal insider trading produces greater informational efficiency without moving too far away from a Pareto-optimal allocation, then it is maybe justifiable. However, I am skeptical. Human nature is a major hurdle. Between the potential abuse and behavioral biases, the informational efficiency will not be achieved fast enough. Who has the burden of proof for this view, the pro or con camp?

on the ethics of insider trading is by Jennifer Moore, and is called “What Is Really Unethical About Insider Trading?”* Moore looks at a number of arguments against insider trading — arguments rooted in fairness, in property rights, and in the risk of harm to investors — and finds most of them lacking. Moore ends up arguing — plausibly, in my view — that the real reason insider trading is unethical is that it jeopardizes the fiduciary relationships that are central to business. If insider trading were permitted, that would put corporate insiders in a conflict of interest. Basically, the interests of corporate insiders would stop being well-aligned with the interests of the shareholders they are supposed to serve. And if the interests of corporate insiders aren’t aligned with the interests of shareholders, then people are much less likely to be willing to buy shares (i.e., to invest) in companies. And that wouldn’t be good for the firm, for its shareholders, or for society in general.

via Ethics of Insider Trading « The Business Ethics Blog.

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Impact of insider crackdown spreads – FT.com

February 20, 2012

Wow! Look what happens when an asset manager is no longer privy to inside information; he is just as inept as everyone else at investing.

As regulators crack down on inside information, particularly in the US, asset managers say increased scrutiny and prosecutions have made it more difficult to talk to companies and affected equity returns.

A more stringent regulatory approach has succeeded in breaking up inside information rings, such as the one run by Raj Rajaratnam at Galleon hedge funds, last year. But this tougher definition of the practice can have the more far-reaching effect of preventing conversations between asset managers and investee companies.

“The return streams from long/short [equity hedge funds] dropped off after fair disclosure [a regulation introduced by the Securities and Exchange Commission in 2000], which finetuned how management can talk to analysts,” says Ray Nolte, managing partner at Skybridge Capital, a fund of hedge funds manager.

via Impact of insider crackdown spreads – FT.com.

Side Note — is an informational edge, which is often a thin line between legal and illegal, mistaken for skill? Like the rest of the hedge fund industry, short bias has suffered over the last 10 years. When it should be flourishing with all of the volatility, short bias does a poor job of diversifying a portfolio. Was short bias not a “skill” but the loss of an informational edge with the advent of Regulation SD? Will investors look back in another 20 years and decide that much of the outsized returns pre-2000 the result of various forms of privileged information?

Additional Side Note — Florian Homm, the manager of the Absolute Return Fund. He was shot in the streets of Caracas, Venezuela, ostensibly because he refused to hand over his Rolex. Several months after the gunshot wound, Homm resigned from Absolute Return which was soon discoverd to be a pump and dump scam in conjunction with Hunter World Markets, a broker with which he was affiliated. So, was it a botched robbery or a botched assassination attempt by some pissed off investors? New rule — if a fund manager is shot, redeem immediately.