Libertarian POV on Inside Trading

[Jsbrads]

This government loves inside trading, imprisoning and fining businessmen and women.

Try to help me understand why our government is wrong.

Firstly, I should be free to say what I like to who I want.

Secondly, the government has no right to tell me what I can and can’t buy or sell.

Thirdly, I get that by buying or selling the CEO is actually delivering a price signal to the market.

Additionally, it isn’t the government’s job to protect the investor.

However, all that said, it seems incredibly in poor taste to me that the CEO can be (somewhat) insulated by his error (or not) at the expense of the investor. (Perhaps this is some sort of emotional little guy vs big guy thing and has no basis in reality, but I also can’t expect any shareholder (even the CEO) not to sell if they believe it is in their self interest.)

[ofd]

Quote

This government loves inside trading, imprisoning and fining businessmen and women.

The problem is a bit more nuanced. On the one hand, every stock market needs a market maker. They  are officially recognized inside traders, because they provide liquidity by knowing who wants to sell or buy. In stock markets, a transaction only takes place when the price is met with a demand of the same amount. Lets say you want to buy 100 shares of a company, but nobody is willing to sell you any shares at any price. In that case, the market makers enter the scene and sell you the stocks from their portfolio.

The government also doesn't mind inside trading when banks do it, using front running. Since banks are not market makers it should be illegal, but nobody seems to care. Front running means that you know about a client's order before and you place an order a few milliseconds before to skim off some profit, cheating your client. Lets say you want to buy 100 shares of a company again, what banks do is to place an option just before your order is executed, so that the rise in stock price that your order will cause benefits the bank.

In fact, governments do all they can to protect the banks from that nefarious practice and they come down on you with all their might if you seem to endanger the banks. The case of Sergey Aleynikov is a good example what happens when you get on the wrong side of a bank. All is set in motion to silence you and to bring you in jail. Aleynikov 'stole' the code that did the front running and he was arrested on some airport. An attorney remarked:

 

Quote

“The bank has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways,”

Which raises the question to anyone with 2 brain cells that if somebody can use that code to manipulate markets then who says that Goldman Sachs itself doesn't manipulate the markets.

https://en.wikipedia.org/wiki/Sergey_Aleynikov

https://web.archive.org/web/20121104233157/http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ajIMch.ErnD4

[Jsbrads]

Stock brokerages often sell to clients stocks that they believe will go down. Some pretty evil $#!+

my last paragraph is the question.

[smarterthanone]

As someone who does not mess with the stock market and who is tired my first instinct would be that the exchanges could have rules regarding this and other behaviors that a company must agree to before they could be listed on the exchange. This way consumers looking at the exchange could expect a certain quality in the stocks listed.

[Boss]

"You want more insider trading, not less. You want to give people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that" - Milton Friedman

If you think or are unsure if the company you are trading is unethical/immoral, you dont need to trade it. The government can't do anything about. I trade stocks and there are countless "penny stock" pump and dump scams. 


Thanks to crypto, there are now decentralized exchanges like bitshares and idex. These will bring more freedom to the world  

[Jsbrads]

I did research it before posting the question. And hearing Murphy describe the history definitely helps. No such regulation before 1968? Insiders lobbying the government to add the regulation... This helps tremendously.

I’m almost all the way there. Just this one niggling concern. When a company is going to fail, the CEO can get his money out before the stock holder, worker. 

[ACStudio]

On 8/21/2018 at 11:05 AM, Jsbrads said:

I’m almost all the way there. Just this one niggling concern. When a company is going to fail, the CEO can get his money out before the stock holder, worker. 

Not necessarily,  often shares or options held by board members or other insiders are on a lock up and can't be liquidated until some certain date and everybody knows what that date is.  But for positions not locked they still have to file with SEC if they are buying or selling stock or options above a certain number.  And that is public knowledge as well...you can view all filings from any number of websites and the EDGAR tools on the SEC website.  Then you have the problem of liquidity.  Just because you have 1 million shares of XYZ it doesn't mean you can walk over to your bloomberg terminal and hit the bid and get a fill.  You would want to find a buyer or buyers to take the other side of the action...often a bank or some entity that can take the position and spread off the risk without ever going through an exchange.  So in reality the small stock holder or worker can be far more nimble.  Not suggesting it doesn't happen occasionally on some scale but it's not as easy as it sounds.

 

On 8/9/2018 at 2:34 AM, ofd said:

Lets say you want to buy 100 shares of a company, but nobody is willing to sell you any shares at any price. In that case, the market makers enter the scene and sell you the stocks from their portfolio.

Markets makers are incentivized to make markets, but are not required.  Just to be clear.  Because you are offering 100 shares of XYZ at a price, and it may be the best price across the exchanges, doesn't mean you will get a fill.  If the market moves away from your price because there are no sellers you will not be filled until you either change your price or the market comes back.  They may or may not want to unload inventory,  For examples see any "flash crash" when the market makers just stepped aside.

 

On 8/9/2018 at 2:34 AM, ofd said:

The government also doesn't mind inside trading when banks do it, using front running. Since banks are not market makers it should be illegal, but nobody seems to care.

That's not really front running in the true sense but anyway, the reason nobody cares is because if you call your bank and put in a "market order" for 100 shares of XYZ instead of a "limit order" you don't get to complain about your fill.  You'll be lucky if you get filled at anything under the high of the day.  And if they are selling you their inventory who cares...all you should care about is your fill price. And that can be determined by you using a "limit order".

 

On 8/9/2018 at 2:34 AM, ofd said:

Which raises the question to anyone with 2 brain cells that if somebody can use that code to manipulate markets then who says that Goldman Sachs itself doesn't manipulate the markets.

A fair question for anyone with 2 brain cells.  But for someone who actually trades it is of no concern.  GS couldn't manipulate something if they wanted to.  More notional value goes through S/P in the first 15 minutes of an average day than goes through Vegas in a year.  The only stocks, futures or ETF's big enough for them to want to manipulate are so efficiently traded that even if they they could push the bids up for a couple of minutes the risk is still there and they could lose like anybody else.

And forget about "front running".  Nobody is going to front run your market order for 100 shares.  They can't.  Self directed investors who use market orders and get filled, get price improvement about 30% of the time for stocks and around 25% of the time for options.  That means that 30% of the stock "market orders" to buy a stock get it cheaper than they were willing to pay, and the same for sellers.  This is a direct result of high frequency traders or market makers or liquidity providers...whatever you want to call them.  They are being demonized by the likes of GS, BOA,etc because they do not favor the big guy trying to get filled on 100,000 share lot of AMZN.

On 8/9/2018 at 2:27 PM, Jsbrads said:

Stock brokerages often sell to clients stocks that they believe will go down. Some pretty evil $#!+

Most brokerages do not inventory stock.  It's a "fill em and bill em" business model.  If your brokerage does inventory stock (there are a few that do I guess) Then I'm not sure it would matter as long as you got filled at your price or better.  And as far as their opinion on whether it will go down or not...who cares?  Trust me, no one knows what any of these stocks are going to do.  What they believe is irrelevant, in fact I'll pretty much take the other side of what anybody wants to do because that's how sure I am that "nobody knows nuthin'"

[ofd]

Quote

The only stocks, futures or ETF's big enough for them to want to manipulate are so efficiently traded that even if they they could push the bids up for a couple of minutes the risk is still there and they could lose like anybody else.

The key to getting rich in this system is to skim off a bit from each order. Small enough that it is viable, but big enough that a large volume of the skimming off makes a profit.

 

Quote

This is a direct result of high frequency traders

Those would never use IOCs to raise the price

[ACStudio]

1 hour ago, ofd said:

The key to getting rich in this system is to skim off a bit from each order. Small enough that it is viable, but big enough that a large volume of the skimming off makes a profit.

Of course getting rich is the intention, but the risk is still there.  If I buy or sell enough shares to move the price of a stock there is no guarantee that it will stay there or that the liquidity will even be available to close them out for profit.  The risk is still there just like anybody else.  And the fact that there is somebody willing to take the other side of that position is the proof.  If it was a risk free trade there would be no taker on the other side.  The counter party to any action like that has the ability to spread off the risk to an extent but risk is still there for everyone involved. 

 

1 hour ago, ofd said:

Those would never use IOCs to raise the price

IOC (immediate or cancel) is a TIF (time in force) designation.  Not sure what that has to do with price improvement for retail traders but I'm happy to discuss it.  

[ofd]

Quote

IOC (immediate or cancel) is a TIF (time in force) designation.  Not sure what that has to do with price improvement for retail traders but I'm happy to discuss it.  

Lets take a real world example. Lets assume you are a programmer at a bank and you want to make the most profit for your institution by making use of having prior knowledge.

Suppose an order comes in to buy 100 000 Tesla shares at a limit price of 420,00. The price at the moment is 419,70. How do you make the most money for your institution with that information if you can use IOCs to your advantage?

[ACStudio]

29 minutes ago, ofd said:

How do you make the most money for your institution with that information if you can use IOCs to your advantage?

IOC is just a time frame designation for an order type so I'm not sure how that enters into it.  But to answer your question...assuming there is 100k liquidity offered at 419.70 and you can get filled at that price the customer will remember you by name next time they talk to your boss and maybe you get that bonus to buy granny that Trans Am she's been hinting about or be a next step player and pick up that custom 2 button navy from Jorge, who pronounces it "nahhvy", down on the Ave that really sets off that power tie you been ratholin' for a special day.  And let me tell you why.  Because if you sell them your inventory at 420 or bill the fill at 420 and the stock never trades 100k at 420 the company will get a phone call or have a lawsuit on their hands from an angry customer and you will most likely lose your job and be lucky to be selling timeshares in Florida to a couple of newlyweds named Bryce and Lacey by next spring.  Times, fills and quantities are all public knowledge.  https://www.nasdaq.com/symbol/tsla/time-sales  I'm not suggesting it never happens but free market solutions are already in place to protect the consumer.   

The transparency and technology available to the retail customer has never been better than it is right now.  I would suggest that every person who has the mental capacity to create an acct and post on this forum is more than equipped to manage their own investments.  Anybody that tells you they can do it better than you is trying to sell you something.   I'm here to liberate the masses from financial anxiety and chew bubblegum....and I'm all outta bubblegum.  

[ofd]

Quote

Times, fills and quantities are all public knowledge.

So it would be no problem to see how many orders are executed at nearly or at the price limit and how many are executed at a lower price?

[ACStudio]

1 hour ago, ofd said:

So it would be no problem to see how many orders are executed at nearly or at the price limit and how many are executed at a lower price?

If I understand your question correctly, yes.   The link I provided shows the time and quantities of the fills for TSLA. Or you can watch in real time on most retail trading platforms.  But to put it simply, the concern someone would have trying to cheat their client is that if they fill an order and bill it at a price higher than what it trades at for the rest of the day then the client can easily calculate that they have been had. 

To take it a step further my concern with that scenario lies with why a person is phoning in an order and paying a huge vig for a broker assisted trade.  Quick story.  I was talking to a guy the other day who fancies himself a pretty savvy investor because he keeps up to date on all the hot gurus and his long/long portfolio has made him feel like the Wolf of Main St along with every other genius that happened to have their sails at full mast when the winds blew their way. And something he said caught my attention.  It almost sounded like he said he called his guy.  “I’m sorry, who did you call?” I asked.  He was calling his broker to make stock purchases.  So I pull out my fancy 4 year old iPhone barely protected by a not so life-proof case and 6 button pushes later I show him the same order put through on my phone and it’s 5$ to execute, round trip.  He’s pushing the outside of 74 so his eyes glaze over like I just flashed him schematics for a night landing on a Russian aircraft carrier but now he’s interested enough now to turn up his hearing aid and start a game of 20 questions.  

The point of the story is this.  With the technology available today there is no reason to pay a someone to handle your investments.  There is no data to suggest that financial experts add Alpha yet they soak up 7-12% of our GDP depending on who you ask.  We are forced to find ways to protect our money from inflation taxation then told it takes an expert to do so despite the fact that none of them have any idea of how to add value as their primary concern is billing the customer and avoiding litigation...not helping the consumer. 

[Azrael Rand]

The topic title presupposes that today's limited liability corporation itself is a moral entity from a Libertarian POV. Is it moral from an individualist perspective to limit a corporation's liability to only the amount invested by shareholders as opposed to combined shareholder net-worth?

[Jsbrads]

Would you rather that if you and I partner and create a company that I be held liable for your behavior?

[Azrael Rand]

Let's say you and I partner and make this limited liability company and we each put in $2000 into the joint venture. One day while I'm out on a sales call I accidentally hit someone with my car and leave them with a medical bill of $50,000. The court awards the individual with the $4000 plus another $2000 in profit we've made so far. Was justice served to the injured third party?

[Jsbrads]

By all means, take responsibility for your own behavior, why does that have anything to do with the company?

[Azrael Rand]

20 hours ago, Jsbrads said:

By all means, take responsibility for your own behavior, why does that have anything to do with the company?

If everybody took responsibility for their own behavior there wouldn't be a need for contracts or courts for that matter. The problem I'm pointing out is that the limited liability corporation privatizes profits while socializing its accountability beyond the firm's liquid net worth. If a company causes an injury to an unrelated third party, leaving him with an expensive medical bill, the company could only be forced to pay out a fraction of this cost due to limited liability. Are you saying there's no problem to be found here from an individualist or libertarian POV?

[ACStudio]

18 hours ago, Azrael Rand said:

If a company causes an injury to an unrelated third party, leaving him with an expensive medical bill, the company could only be forced to pay out a fraction of this cost due to limited liability.

The LLC can have insurance on their autos and other insurance types.  Also what you have described sounds like a "close corporation" https://www.law.cornell.edu/wex/close_corporation   which doesn't always shield owners from liability, see "piercing corporate veil" https://www.law.cornell.edu/wex/piercing_the_corporate_veil  obviously not my area of expertise but a quick google search shows some free market solutions.  One could create a million "what if" scenarios but these things can usually be sorted out without coercive force. 

[Jsbrads]

A corporation doesn’t do anything. People do things. Hold a person responsible.