insider trading is not victimless; the counter party suffers a loss.

Reader comment on: Insider Trading Victims

Submitted by northfork investor (United States), May 18, 2011 17:16

You have some kind-of-interesting counterexamples, but in general Mr. Madrick's first comment--identifying the insider trader's counterparties as victims--is right on target and is not generally identified by the law and economics types who echo Friedman's comments that insider trading promotes market efficiency.

I know. I have traded deal stocks for 25 years and can clearly identify when I have been induced to trade by an inside trader (either directly or by his momentum trading followers). I say "induced to trade" because the insider trader's trade create price signals perhaps pushing a stock above its trading range or creating unusual volume that I might interpret as a market inefficiency assuming I have the same information set as he has. So I will enter a trade in response to that unusual price action--perhaps selling him my stock.

Alas I did not have the same information set. The next day or following the weekend, I find that the stock I had sold had entered into a merger agreement or some other event was disclosed that the insider trader knew but I did not.

Hopefully this makes more sense to you now.

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