Insider Trading Regulations

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Insider Trading Regulations

• Brought to you by
• James Bertsch

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• Policy and how it works.
• Policy provides for SEC to implement harsh
  punishments upon those who violate law by trading
  on information that is not available to the
  public. These include fines and/or imprisonment.
• The public is the winner because regulations
  increase consumer confidence in corporate top
  management teams and boards.
• The losers are the market and those who are found
  guilty of violating regulations.

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• Economic justification Insider trading
  regulations help to ensure consumer confidence in
  corporate trades.
• Provide stiff penalties for those guilty of
  violating these laws!
• SEC is cracking down heavily on insider trading
  because of recent scandals involving high profile
  investors such as Martha Stewart and Sam Waksal
  of ImClone.

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• Confidence increases with these regulations

MPC
MPB w/ insider trading regulations
MPB w/ Loss of confidence
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• Losers- Market
• It is very hard to ID Insider Trades. Which
  Increases MPC

MPC with Trading Regulations
MPC
MPB
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• Economic Policies
• A price distorting tax which economically harms
  those who do not violate policy.
• A corrective regulation that increases MPC beyond
  the level need to correct the inefficiency in the
  market.
• Prisoners Dilemma- fine and imprison everyone
  for insider trading as much as possible, no
  matter size, eventhough regulations are extremely
  vague.

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• Price distorting tax created
• This is because those who abide by the laws are
  required to carry the burden of those who are
  guilty of violating this policy.
• Additional filing costs will increase the number
  of filers from 52,000 to 65,000.
• With the average filing take an average of 5
  hours, each filing will cost 762.50.
• This will result in a total cost of 49.5
  million.
• With a approximately 247 cases in 2002, those who
  abide by these regulations will pay for all but
  300,000 of these filing costs.

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• Price distorting tax results in DWL

MPC plus Filing Costs
Costs associated with Insider Trading
MPC
MPC w/ Filing Costs
DWL results from the addition of filing costs.
These costs do not determine who is guilty and
who is not, so corporate investors who abide by
rules and regulations are affected negatively by
these costs
MPC
MPC w/o Filing costs
MPB
Proper Insider Trading
MPB w/ filing costs
MPB
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• Inefficiencies caused from MPCltMSC
• Costs associated with the filings help to
  increase consumer confidence.
• A price must be paid with this additional
  consumer confidence!
• While increasing the MSC, MPC will remain as is
  creating inefficiencies.

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Prisoners Dilemma
No Insider Trading 2 pts
Commit Insider Trading 0 pts
Payouts
No Insider Trading 2 pts
Commit Insider Trading 0 pts
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• Prisoners dilemma-
• Only two choices to make.
• Pareto Superior Move would be to commit no
  insider trading. This would never happen because
  corporate investors would take advantage of the
  commons.
• Few gain wealth when one person decides to commit
  insider trading while the other is no worse off.
  Pareto Optimal moves.

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• Prisoners dilemma
• Everyone is worse off if all commit insider
  trading resulting in a move that is Pareto
  Ineffiecient.
• This is the tragedy of the commons considering
  this regulation. If everyone would be ethical
  and abide by the rules than everyone would be
  better off.
• Free riding will occur. People will rely on the
  others to carry them while doing what is best for
  themselves rather than the whole.

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• Solutions for Economic Policy
• Clearly define what constitutes insider trading
  and what does not. Laws can be extremely vague
  when it comes to the prosecution of Insider
  Trading.
• This will aide to create a greater consumer
  confidence as well as save taxpayers money paid
  to prosecute these high profile violators!
• Increase Penalties on the Corporate Investors for
  violating regulations to deter Insider trading.

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• Solutions for Economic Policy- continued
• Lower filing costs to corporate investors. This
  will affect MSC and by lowering costs market will
  become efficient where MSCMPC.

Costs
This is because MPC equals MSC because of the
lower filing costs to the public
MSC MSC MPC
MPC
Decrease the cost of filing to the point where
MSC MPC at E
E
P
P
MPB
Insider Trading
Q
Q
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• Sources used for economic analysis
• Baldwin, William Off With Her Head
  www.forbes.com 7/7/03
• Khan, Walayet and Lamba, Asjeet The
  Effectiveness of Legal Sanctions in Curtailing
  Insider Trading Evidence from Exchange Listings
  Quarterly Journal of Business Economics, Winter
  2001, Vol. 40, Issue 1, pg 3-13.
• Freedman, Michael Will She Walk www.google.com
  7/7/03
• NYSE, http//www.nyse.com/content/articles/1043269
  646568.html
• Roberts, Bill Growing Pains Electronic
  Business, May 2002, Vol. 28, Issue 5, pgs 64-69
• United States Government (SEC) Final Rules and
  Regulations of Insider Trading
• Valenti, Catherine The Insiders
  www.abcnews.com 6/24/03