The good side of inside trading

All About Alpha has a post called Insider traders: rogues or whistleblowers?

It is a pleasantly disturbing look at insider trading in that it challenges the reflex reaction that inside trading is all bad.  In particular the final paragraph discusses an interesting inconsistency.

One issue that is highlighted is that it is harder for negative news to come out and be priced in.  Apropos of this is the quote:

Lambert goes on to say that the resulting overvaluation of stocks (which is supported by existing management incentives and investment industry apparatus), is actually more harmful to society than the potential under-valuations that could occur if insider trading was allowed in “price decreasing” situations.

I’m not sure what scheme is imagined for price-decreasing insider trading, but I think there could be a problem.

When I worked at a bank, I was restricted from shorting stock in the bank.  While I would have liked to have been able to short the stock, I was pleased that presumably everyone else who worked there was banned from shorting it.  If you have a large enough short position and a powerful enough lever, losing your job will be of little consequence.

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1 Response to The good side of inside trading

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