The insider trader acts on his special knowledge of the new likely price of stocks. Should he be morally or legally compelled to communicate what he knows to prospective buyers or sellers? No. It would not be possible.
One of Nassim Taleb’s key concepts is “skin in the game:” having something concrete to lose should things go wrong. A general who leads his army from the front has skin in the game, as did the invaders of Spain who burned their ships, putting the sea at their backs and making retreat impossible. Socrates and Jesus had skin in the game. Skin in the game means exposing oneself to the downside of being wrong. Talking heads on the news have no skin in the game, nor do academics, nor do commission-driven stock brokers who have only upside.
One of the few references to insider trading that Taleb makes is simply the dictum to pay more attention to actions than words – always good advice. The claim that those defending insider trading make is that insider trading “informs the markets” of facts relevant to the value of stocks. It is not about the “true” value of the stocks, since the price of anything is determined by supply and demand. But they are facts that will probably affect the price nevertheless.
The insider trader knows that shares in a company will most probably go up in price, or down in price, once certain facts about a company become widely known. Now, one seemingly moral thing he could do is to try to communicate this fact verbally. He could call up the Wall Street Journal, or some other publication more directly trade related, and say “this stock is currently undervalued, or overvalued.” The difficulty? This would resemble a classic attempt to manipulate stock prices. He could be lying. Prior to his announcement, the putative insider trader could buy the stock, or short the stock (bet against it), while simply pretending to have special insider knowledge. The only way to communicate to the rest of the market the insider trader’s real perception of the likely future value of the stock is to actually buy or sell the stock – to put his money where his mouth is – to put his skin in the game. Up until then, other traders have no reason to take him seriously, and the insider trader could be making his various statements for self-serving reasons. It is the difference between a cad saying sweet nothings to achieve his goals, and actually marrying someone without a prenuptial agreement.
Hypothetically, a CEO could claim that share prices should go down, and then buy them up at a discounted price when shareholders took him at his word. Or, do the opposite.
Hayek wrote about the intelligence of markets governed by supply and demand. One of the problems of command economies is how to price things. Nobody at all knows what the appropriate or “real” price of anything should be. The only way to find out for real, rather than simply hypothetically, is to put something up for sale and to see what happens. This is truly useful information and no economic savant or governing tyrant can supplant the wisdom of markets. If the government starts to manipulate the price of things, then the “real” value of things becomes unknown. Government interference in the mortgage market through Fannie Mae and Freddie Mac – mortgages that were not officially backed by the US government, but unofficially were government guaranteed, as eventually proven by the “too big to fail” bail outs – contributed enormously to the 2008 housing market collapse as firms exploited this fact to make bundles of mortgages look better than they really were. Insider trading is the only way for the stock market to take advantage of the wisdom of markets.
If it were somehow possible for an insider trader to communicate the real expected changes in the value of a stock in some utterly convincing manner, such that everyone believed him to be sincere and honest, then insider trading would fail Kant’s test of whether an action could be universalized. If an insider trader could prove that his reckoning of the future value of a stock was accurate, then when he tried to put his money where his mouth was, it would not be possible. Were he to try to buy, no one would sell, and if he tried to sell, no one would buy, and the new information would not get transmitted to the market. The price of the stock would not follow the insider trader’s estimates. But, this perfectly believable communication cannot be done.
Merely verbally informing the markets is not possible. It is necessary for the insider trader to actually buy or sell stock for the “real” value of the stock to become common knowledge. In the real world case, no one would believe the “all talk” insider trader. And in the strictly hypothetical instance where perfect honesty could be proven, the stock prices would not follow the insider trader’s predicted path anyway.
There is something repellent about selling a stock that you are almost sure is overpriced to an unsuspecting buyer. It seems analogous to selling a car when one knows it has become a lemon. However, actions speak louder than words in this context and the verbal communication of likely stock prices will not work. The dubious seeming transaction is necessary for the whole market to be informed.