Insider Trading

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When
a transaction from an insider-supplied tip on a publicly-traded
stock exchange occurs, the laws of supply and demand ensure that
the buyer or seller on the other side of that transaction benefits.

Insider-trading
tips are, by definition, exclusive and not commonly or publicly-held
information. Those on the other side of the transaction are not
privy to this information; indeed, if they were, logic dictates
that they would be performing the opposite transaction.

A
stock-exchange is the coming together of a large number of buyers
and sellers who transact their business anonymously. I have no clue
who buys the shares I sell nor who sells the shares I buy.

But
the buying and selling that takes place on the floor of the stock
exchange is subject to the laws of supply and demand.

Suppose
I have insider information that company A is not going to receive
FDA approval on a drug it has been working on for years. Selling
my stock before this information becomes public knowledge would
be prudent because, once known, it is logical to assume the stock
price will fall.

However,
the buyer who buys my stock is anonymous…and this buyer would
be in the marketplace attempting to buy the same quantity of stock
regardless of whether I decide to act on my insider information
and place an order to sell. His presence in the marketplace is 100%
exclusive of any decision I make; he will be there regardless.

The
laws of supply and demand state that the more buyers there are for
a commodity the higher the price the commodity being traded will
fetch; the more sellers there are, the lower the price.

My
presence in the marketplace selling the stock in question means
that the price that the stock will eventually be sold must be less
than what it would be without my presence in the marketplace. The
buyer, who will be there regardless of whether I am there selling,
benefits from my decision to sell by obtaining the stock he seeks
at a price lower than what he would have paid for it without my
presence.

The
laws of supply and demand create the same effect if I had insider
knowledge and was buying instead of selling.

Insider-trading
is not only a victimless crime, it is unique in the annals of the
criminal code in that the alleged victim is the beneficiary of the
alleged crime.

July
3, 2002

Tony
Kondaks [send him mail]
lives in Mesa, Arizona. See his website TaxTimeBomb.

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