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Trading: Securities and the Market > Lecture 6 > Flashcards

Lecture 6 Flashcards

1
Q

Efficiency comes in two forms:

A

Pareto efficiency
&
Informational efficiency

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2
Q

What is Pareto efficiency?

A

exists when no other feasible allocation of resources and technology can improve one person’s situation without harming that of another.

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3
Q

What is Informational efficiency?

A

achieved when all investors hold objective beliefs and information in common, so that competitive prices accurately reflect that information.

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4
Q

Fairness can be thought of a claim to certain entitlements:

A
  • Freedom from coercion
  • Freedom from misrepresentation
  • Equal information
  • Equal processing power
  • Freedom from impulse
  • Efficient prices
  • Equal bargaining power
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5
Q

List some (4) financial regulations:

A
  1. Insider trading regulations
  2. Mandatory disclosure regulations
  3. Margin regulations
  4. Trading interruption regulations
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6
Q

What is inside information definition?

A

Inside information is material information obtained from management that is not widely available to the public.

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7
Q

Does inside information include information obtained from someone who obtained it from management?

A

Yes; Managers must control the dissemination of material managerial information.

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8
Q

What is insider trading?

A

Illegal insider trading traditionally defined as “execution of transactions on the basis of material non-public information”.
•In the US, reference to “violation of a relationship of trust and confidence”.

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9
Q

Does Australia have the violation of fiduciary duties in definition?

A

No

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10
Q

Registered insiders are allowed to do what with non-public information?

A

are forbidden from trading on material non-public information

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11
Q

Registered insiders are forbidden from trading on material non-public information based on

A
  • the disclose-or-abstain theory.

* the misappropriation theory

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12
Q

What section in the Corporations Act defines inside information?

A

1042A Corp Act 2001

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13
Q

How does the 1042A Corp Act 2001 define inside information?

A

defined as information that is not generally available, which is likely to have an effect on the value of a financial product.

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14
Q

What ASX Listing Rule require an entity to report to ASX any material information?

A

Rule 3.1

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15
Q

Why have insider trading rules?

A
  1. The public demands fairness
  2. To protect dealers and limit order traders from inside traders.
  3. To remove unwanted distortions in the managerial labour markets.
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16
Q

What are likely effects of insider trading rules in regards to adverse selection components?

A
  1. see reduction in the adverse selection spread components.
17
Q

What are likely effects of insider trading rules in regards to capital?

A

More capital will be saved by uniformed traders when
•liquidity is cheap,
•markets are widely believed to be fair.

18
Q

What are likely effects of insider trading rules in regards to price efficiency?

A

Prices may be less efficient in the short run.

19
Q

Arguments for permitting insider trading, who is the most famous economist that argues for insider trading?

A

Milton Friedman

20
Q

What are the do some arguments to permit insider trading?

A
  1. Insider trading rules cost too much to enforce

2. Insider trading may increase liquidity by quickly eliminating information asymmetries.

21
Q

Problems with insider trading for Corporations if managers can trade on inside information …?

A
  • Will they share information with the public, the board and other competing insiders, they could selectively disclose or hide it for themselves.
  • Effects on management decisions that impacts on information asymmetries, will they try and make decisions that will increase information asymmetries.
  • Effects on shareholder values decrease as people front run the company.
22
Q

Can insiders trade legally and what are the requirements?

A

Registered insiders usually own shares in their own companies.
•They may trade in these shares provided they inform the regulators about their trades and do not trade on material non-public information.

23
Q

When are insider traders most likely to occur?

A

Non routine trades, or trades by babies.

24
Q

What is market manipulation and what price level does it want to create/maintain?

A

is an act or transaction that is intended to or likely to have the effect of creating or maintaining an artificial price level in a security.

25
Q

Types of manipulation:

There are three broad categories:

A
  • Action-based manipulation
  • Information-based manipulation
  • Trade-based manipulation
26
Q

Action-based manipulation:

A

Manipulation based on actions that change the actual or perceived value of the assets

27
Q

Information-based manipulation:

A

Manipulation based on releasing false information or spreading false rumors.

28
Q

Trade-based manipulation:

A

Manipulation based on buying and selling of securities without observable actions to alter the value of the firm or releasing information to change the price.

29
Q

What are 3 examples of Trade-based manipulation:

A
  • Spoofing: sending out orders and then cancelling them very quickly (high frequency trading so they are never executed)
  • Corners and pools: they pool together their money and if they think there will be a demand in gold they will buy out all the contracts and then sell them to the people who need them at a high price.
  • Wash trades: involve buying a selling of a security to create a impression of where the shares should be- create and maintain a artificial price
30
Q

Trade-based manipulation can be technically defined as a market-manipulation trading strategy that:

A

takes a dynamic trading position in financial securities that moves prices and satisfies three conditions:
•trader’s wealth after liquidation of the position is expected to be greater than the amount of wealth required to initiate the position,
•the trade is not an arbitrage opportunity that would also be available to small investors,
•the strategy is independent of information, and the trader uses the strategy because he feels the strategy itself creates the expectation of profit.

31
Q

What kind of manipulative trading is the hardest to eradicate?

A

Trade-based manipulation

32
Q

Manipulation is possible only when market structure does what?

A

Departs from perfect markets

33
Q

How can we limit manipulative opportunities?

A

Improve market efficiency

Trading: Securities and the Market (7 decks)

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