I don’t fully agree with Max Keiser’s politics, but I do love his video prediction market journalism. Max, you’re great, here.
Chris F. Masse July 19th, 2008
- Exchanges & Markets , Journalism, Editing & Publishing , Politics , Prices & Probabilities
- Comments(15)
Max suggested insider trading isn’t illegal on Intrade.
Well, here’s John Delaney’s (CEO Intrade) view :
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http://freakonomics.blogs.nyti.....n-delaney/
Q. How does Intrade deal with insider trading?
A. Insider trading is one of the wicked problems, perhaps. Intrade is about providing the best predictive information. If insiders have information, then getting that information reflected in the market increases the quality of the information. I know this is not the conventional view concerning insider trading, and I am not arguing wholesale adoption or acceptance of insider trading. But we all know that, in the real world, insiders trade on inside information. We have even had markets on insider trading. Our view is to get the best information available into the market while we make sure there is some fair protection for outsiders.
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Bloody hell. I’m not even going to analyze that for you.
What the hell does John expect me to do ? Bet against insiders and lose another 5-10% on top of Intrade’s commission. Granted… there are enough idiots who want to play that way, who’ll gladly hand over their hard earned cash to the scum of the earth. Never mind me.
A note on insider trading – for the unwary.
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When playing the stock market, or prediction markets, as an unexperienced player you’ll probably lose money. It takes years of experience, and if you are a quick learner, you might develop certain skills. These skills should eventually translate into hard cash, that’s the name of the game, right ? Wrong! This will be the stage where you’ll be battling the insiders because, as you will be able to detect value more often, you’ll be betting against insiders more often. You’ll become increasingly aware of that when your value bets lose more often than they should have. As someone who has been invited to join a class action lawsuit 7 times, and that was just over the course of 18 months or so when US regulators and lawyers were focusing on the issue in the stock market, I should know about these things. Also keep in mind, that all of this happened while insider trading was blatantly illegal.
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So, for any operator to say that insider trading on prediction markets – “it’s a loose thing… and it’s kind of happening… “ bullshit! It’s a serious problem that will ruin the essence of the game, which ough to be about skill. The right policy for any operator or regulator is to fight insiders as hard as possible because even when you do, there will be enough rats who slip through the net. And I will stick around to keep that awareness alive, hoping that we can avoid getting ourselves into a situation where prediction markets are nothing more than a rotten business to be in.
“Go forth and multiply” said John Delaney to the insiders, “we need you on our exchange”.
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Why do people have to make the same mistakes over and over ? John Delaney – why do you have to make the same mistake ? Let complacency be the breeding ground for insider scum to grow and multiply ? Think again. Stick your head in the sand and hope your problems will vanish into thin air ? Think again. Play down the problem yourself and hope your customers will swallow it ? Possibly…
Delaney echoes some of the same ideas as Milton Friedman:
“You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that.”
Something to consider, for our economics dream team on Midas Oracle.
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Degrees of market efficiency
Three different degrees:
Strong form: no information, not even inside information, can be used to get an above-normal return – this means that there is no need for insider trading laws
Semi-strong form: no publicly available information can give an above-normal return so fundamental analysis (valuing companies using publicly available data) is useless
Weak form: information about historical prices can not give an above-normal return – so technical analysis creates no value
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Most academics believe in the semi-strong form
So they acknowledge that inside information can give an above-normal return
Few practitioners believe in any form of market efficiency
Although remarkably few of them have a track record to suggest that they are right!
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Right….and how do we suppose that comes about ? The answer has been given on this thread. Possibly we could inspire some researchers who can then provide evidence of what I already know. The alternative is that we keep believing these (and I checked with other articles, who favor the semi-strong form as well) fairy tales forever. Because…. wouldn’t it be great, if it were possible to beat the market by using knowledge/experience? We’d still have to get rid of the insider scum though. Tough job.
Stacy, thanks for your comments. I didn’t know that. Now we’ve got something to work on. It’ll always be a trade-off, depending on how you view the public. Friedman envisioning the public as being cattle (like Delaney to some extent) doesn’t work for me, and not just from a personal point of view. I will be back when I have absorbed his views. The simple fact of the matter remains (which he is probably not aware of) that when you are placing value bets, you are more likely to engage with an insider, thus your value is lost again. That works to an extent where you consider every trader to be an idiot, uncapable of detecting value, or uncapable of handling the truth.
He lived to see some of his laissez-faire ideas embraced by the mainstream, especially during the 1980s, a watershed decade for the acceptance of Friedman’s ideas in many countries. His views of monetary policy, taxation, privatization and deregulation informed the policy of governments around the globe, especially the administrations of Ronald Reagan in the U.S., Brian Mulronay in Canada, Margaret Thatcher in Britain, and Augusto Pinochet in Chile.
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Ok, so he is one of the bad guys. You did see David Icke’s video ? - some would call him a fascist.
Nothing about this guy impresses me . “Cattle” was exactly the right term to use. I had a feeling it was.
Maybe I was a little quick in judging Friedman yesterday. But we did start off on the wrong foot, and I still don’t see how anyone could justify and approve of insider trading. As much good as he may have done, he has also contributed in the public being more tolerant towards white collar crime (and the ever increasing gap between rich and poor) by not paying close attention to matters which concern us all, like insider trading. Something that can be seen on Midas Oracle today as well, when most people simply want to get the prediction markets off the ground regardless of the negative consequences. But something you’d certainly expect from a nobel prize winner, even within their zeitgeist. It just seems to me that a lot of people are unaware that proper regulation is in the public interest. Which could be a reflection of the poor job regulators are doing in general, perhaps.
I only linked to the info on Milton Friedman to demonstrate that it wasn’t all that an unusual position to take - re: insider trading being an acceptable practice.
Re: insider trading on prediction markets . . . well, I’m no expert, you would have to talk to Max or Chris on that, but the issue of insider trading on prediction markets seems a bit murkier to me. Insider information provides price discovery in a manner that it doesn’t on financial markets. Ie., a publicly listed company has a prospectus and quarterly reporting from which investors make their decisions to buy or sell the company’s shares. It’s all income and expendictures and transactions and reporting based and when someone trades on the information before it becomes public, well I think that’s wrong because it is a no lose bet for them but more importantly the unfair advantage they are gaining is over their own investors. On most event contracts, however, there is no prospectus and information only becomes public with the event happening. So even inside information on event markets is, it seems to me, far less perfect than the inside information often available to corporate insiders.
By the way, I believe one of Milton Friedman’s arguments for insider trading is that it acted as price discovery for other investors. In the case of Enron, for example, had insiders been shorting the shares aggressively, Friedman would argue, other investors would then realize that something was wrong but that was not being reflected in the company’s own statements - or in its share price.
In the case of Enron, for example, had insiders been shorting the shares aggressively, Friedman would argue, other investors would then realize that something was wrong but that was not being reflected in the company’s own statements - or in its share price.
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That’s not true. Stocks get seriously undervalued or overvalued, depending on sentiment, a big buyer/seller, overreaction etc.
Besides the fact that we have clear guidelines and laws against insider trading in the stock market, and for a good reason, I want to point out the following.
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Napster (NAPS) was valued at $1.08 last wednesday. I think they have about $1.40 in cash per share, and when considering the company isn’t doing that bad on an operational level, it was outright buy. Unless that big seller a couple of days before was an insider. I don’t know, but this time (and I don’t trade much these days) I took a chance. Also, because I believed the stock market could get a pop any moment. It didn’t do much on wednesday or thursday but the stock skyrocketed 28% on friday, there was no news I’m aware of. It was a good call, this time, although I didn’t take the whole 28% as you can imagine.
There have also been occasions where I was trapped, by insiders, and lost a significant amount of money within 1 or 2 days. And other people’s money with it. My point is, I don’t want to ask myself constantly whether I’m being set up, or whether I’m detecting real value. Let the insiders in, and they will squeeze me out of the market. It’s that simple. Is that how it is going to be ? Surely it can’t be ! At least we have laws in the stock market that offer me just enough protection to be still around, from time to time.
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We’ll get back to prediction markets. But it really shouldn’t have to be rocket science how to deal with them.
There’s another fight going on against insiders on the betfair forum.
http://site.forum.betfair.com/.....ID=1585737
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“artie you are clearly doing your best to act like an idiot”
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artie actually believes people will not lose any money to insiders, in this case non-triers in horse racing.
Or he could be working for betfair.
Stacy, I promised I would get back to you on prediction markets. I just had to give this a little more time. Look at it as an investment.
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1. Anyone can become an insider.
It’s not just the people closely linked to a specific company, at high positions, who’ll have access to valuable information from an insider trading perspective. We have a whole wide range of event contracts, from weather forecasts to politics to, you name it. Any scientist, any person working in a specific area could at some point in time get hold of valuable, non-public information. And with it the opportunity to make an awesome amount of money, in a “legal” way, assuming there’s sufficient liquidity. And I wouldn’t dare ask who would be able to resist that temptation in an unregulated environment.
Note that we can create criminals when policies are lacking (even when we have laws in place) - the injustice of current taxation laws are creating criminals all the time.
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2. Leverage
What we ‘re usually dealing with in the stock market, when earnings are released, is an average shift of 10% or so in the share price. There’s a bigger shift in price when we consider M&A activity. But even then, there’s a lot more opportunity with prediction markets, where you could increase your investment 10-fold, even 100-fold on some occasions.
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3. Predicting/Affecting the outcome
When a corporate insider gets hold of valuable information, he’ll still have trouble calculating the effect/outcome following an earlings release, to some degree, for different reasons. The market can react tolerant at one time, intolerant at another. The market can punish a company for a very specific reason, something which the insider hasn’t taken into account prior to the earnings release. There could have been other people within the company who had access to the same information before him. The information could even be out-dated. Despite all of this, we have clear guidelines on trading shares in the stock market.
Now let’s take the example of a scientist making a valuable discovery. It isn’t hard for him to figure out he is the first one to get hold of that information, because he made the discovery himself. It isn’t hard to see how his information would influence the market either. It’s simply a matter of how much, less so in what direction. So maybe he even decides to hold on to that information for a while in stead of bringing it out in the open. Because he needs time, lots of it, to be able to match as many bets as possible. And he wants to do it in such a way that won’t cause the price to shift too much. A scientist withholding valuable information from the scientific community ? It doesn’t get much better.
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4. Tolerance towards insider trading fuels market manipulation.
It does get better. You don’t need to actually make a brilliant discovery. All you need to do is make others believe that you did, a tactic more commonly used by our governments these days. Anyone can do it, especially when the government teaches us how to do it. Maybe you need to be a prominent figure to be able to do that, or a widely known and respected scientist etc. Either way, people opposing my view could always try and convince me that society can easily do without these prominent figures should they be expelled, or God forbid, sent to jail.
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5. Midas Oracle
People actively involved in the event itself are allowed to become market participants. This is what you’ll notice predominantly in sports betting, but other areas as well. These people have the ability not only to influence the result, but to determine the outcome as well. Unless organized crime will dictate it for you by threatening to kill your children if you don’t comply. Game, Set and Match.
Re: point one. I’ll play devil’s advocate - and this does not in anyway mean that I endorse insider trading! First, in most cases it’s very hard to know the outcome for certain. Even armed with insider information, it is still a gamble to bet on how the markets will respond. Markets react bizarrely to news. Sometimes news will come in that say Apple sold 40% more iphones than they had forecasted and then the market sells off? Or the US Treasury takes on $5 trillion in mortgage debt by effectively nationalizing Fannie and Freddie and yet the dollar then rallies even though the national debt has doubled.
On point four I agree. Obviously the favorite to win a horse race can make a bundle by ‘falling off his horse’ or the champion boxer can take a dive. This I think is probably market manipulation first then insider trading. Like with Enron - they were trading on inside information on their market manipulation that had not yet been made public. Like the boxer or jockey who has no intention of finishing the race, Enron wasn’t really a company. It was trading fake contracts with dozens of fake companies. There was no business and the insiders knew it. They had manipulated market participants into believing there was even a company there in which to buy shares.
Stacy,
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Actually, I don’t think we are in disagreement. What you’re saying is what I tried to point out in point 3 - that it’s harder to predict the end-result in financial markets as opposed to prediction markets in general, because there are so many variables to consider. Sports betting must be on the other side of the spectrum. With this in mind, and given we have laws against insider trading in the financial markets, you’d expect we’d have them in prediction markets as well.
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Enron had quite an impact, even here in Holland. But the story here is that of Ahold. Someone had been warning earlier about companies reporting constant revenue growth year on year and Ahold was just that type of company. But I still doubled my investment with this company during the Iraq war as it was quite undervalued. Two days later they dropped the bomb and it didn’t take long for me to understand who I had lost my money to, and why it had become so undervalued. It wasn’t because of the Iraq war. This was one of Holland’s finest so nobody expected this to happen either. There goes some of the economists arguments again, out the window. Markets rely on trust. Cheats want to exploit it.
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On a general note, market manipulation, insider trading and company fraud all go hand in hand. General acceptance in one area will fuel other areas. Public complacency is what (potential) cheats want.
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It’s a no-brainer really.