The Most Valuable Commodity Is Information for a Financial Market

Suppose that Company X has scheduled a major new software disembarrass next week. The release has been extensively discussed in the trade press, with hypothesis about how well it testament be received by consumers. But what if, due to technical bugs, Company X has recognise that it merchantmannot release the product by the intended date? at once the resolution is do, the world will know, only when until it is made, only bodily insiders know. They excessively know, or can reliably guess, that once the announcement is made, Company X's stock will drop. The temptation is strong for these insiders to mete out their own stock before the announcement, to escape the losses that they exclusively know are coming.

The temptation may be strong, but it is also illegal. Such an action constitutes "insider craft," and it has been against the law ever since the advanced(a) system of stock market regulation was put in place in the wake of the Great Crash of 1929 (Stevens, 1987, pp. 12-13). Insider trading was made illegal because of the belief that it fundamentally undermines the proper summons of a free market. To sell a stock on the basis of inside information is the equivalent of selling a car while lying about its condition. If much(prenominal) demeanor is pervasive, the market cannot function at all, because no one can trust the information they are being given.

much of the 1980s, insider trading became a problem of crisis proportions on paries Street. Some of the most prominent figures on Wall Street, notably Ivan Boesky and Michael Milken, wound up in federal prison house as a result of their insider-trading activities, and were also slapped with fines in the hundreds of millions of dollars--Ivan Boesky would be hit with $100 million in forfeitures and penalties, while Michael Milken would be fined a staggering $600 million (Stewart, 1991, p. 16). The effects of the insider-trading scandals reached far beyond Wall Street itself. A substantial fraction of the American economy was wrapped up in one means or another with the actions of the insider traders, and hundreds of thousands of jobs--and therefore lives--were disrupted in greater or lesser degree.

Technology, which had increased the turbulence of the overall economy, also influenced the markets directly. Computers made it possible to keep track of stock movements on a minute-by-minute or even second-by-second basis, and could be programmed to buy or sell automatically, based on "technical analysis" of unfirm stock patterns. The accelerating pace of stock transactions fed on itself, bring into being new instruments such as "derivatives" (in effect, guesses as to the future value of a stock), and new trading methods such as arbitrage, which depended on the tiny, minute-by-minute changes in the relative price of derivatives and the underlie stocks (Stewart, 1991, pp. 30-31). When market volume had been a few million shares a day, the profit potential of these techniques had been limited. As daily volumes became tens of millions of shares a day, and therefore a hundred million or more, fortunes could be made almost overnight in derivatives and arbitrage.

The remainder of this discussion will be devoted to an examination of background forces that led to the insider-trading crisis of the seventies and 1980s. Only the briefest summary will be given of the crisis itsel
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