Week 9 - Trading gone Awry Flashcards
What is insider information?
Material obtained from management that is not widely available to the public
What is the US definition of illegal insider trading?
Trading in breach of fiduciary duty or other relationship on the basis of non-public information
What two theories explain the prohibition of insider trading
- disclose or abstain theory
- misappropriation theory
What is insider information defined as in Australia?
information not generally available to the public and if it were, a reasonable person would assume it would have a material affect on an assets value
What is the Australian definition of insider trading?
trading on insider information or communication of insider information to others that will or likely will trade on the information
What is front running and it is illegal?
Broker uses information of large pending orders of their own client and places their order first to benefit from the price impact
What is the aim of financial regulators
optimise market outcomes of efficiency and fairness
What are the two forms of efficiency?
- Pareto efficiency
- Information efficiency
What are the characteristics of market fairness ?
Freedom from collusion
freedom from misrepresentation
equal information
equal bargaining power
What are the effects of insider trading?
- reduced adverse selection component of transaction costs
- Less efficient prices in short-run
- uninformed traders save capital when:
a) liquidity is cheap
b) Markets are believed to be fair
What are the pro insider trading arguments?
- Rules are too costly to enforce
- Increased liquidity by quick elimination of information asymmetry
What are the corporate issues of pro insider trading?
- Will executives share information with the public, board or shareholders?
- Influence of managements decisions and available information
- Hurts shareholders from front running
