A fun thought experiment. Suppose someone invents a time machine that gives the correct price of all securities at all future points in time.
1) Would it be against current rules to trade on this information?
2) If someone did use this machine surreptitiously to their own gain, how quickly will they approach owning 100% of everything?
3) If the entire data set of future prices were made publicly available, what would happen to markets? I mean, exactly, what would happen to stock prices?
2) Depends what they're trading, and how much capital they have to start with. If our inventor can only buy and sell the S&P 500 they can't make a whole lot - it generally climbs at a pretty steady, known rate; when it moves dramatically it's usually a fall rather than a rise, so you need to be able to short to take advantage of those moments. If the inventor's buying and selling junk bonds, or advanced derivatives contracts, they can make money pretty quickly for as long as they can find people willing to trade with them.
Also the total value available to be made in HFT is pretty low (on the order of tens of billions of dollars/year). To make serious money you need enough capital to be able to make somewhat longer-term investments.
3) Prices for mature, stable, dividend-paying companies would increase a little bit so that their P/E matched that of Treasury bonds. Futures contracts would probably stick around (although they're now essentially just another form of loan) but options would disappear, because you'd have to be stupid to buy/sell them.
The effect on the industry is that there's a lot less inefficiency available to exploit, so much less money to be made. The industry contracts; market-making becomes a boring way to earn small amounts of money, like car insurance. The smart people go elsewhere.
For riskier investments and especially young companies we'd see more dramatic shifts; a share in Facebook is now worth however much a share in Facebook is worth as a mature company (discounted by the risk-free interest rate). So a few would shoot up to 40x their current value, while many would drop low enough to be delisted.
In the slightly longer term an IPO becomes some kind of weird singularity - everyone knows which companies are going to be huge, as soon as they go public. The SEC would hopefully relax the rules (because their reporting rules are now basically obsolete) so we'd see companies being listed much sooner, or even funded based on whether or not they show up in the future data. Suddenly, every startup is a megahit, and there are many more of them, because it's now a safe way to make enormous amounts of money, so everyone wants to found one (or at least, everyone who has it in them to found one that works). The market abhors safe ways to make lots of money, so all the investment money available pours into this, and we hit the singularity in fairly short order.
They wouldn't even need to trade securities. Just search the future data for some successful tech IPOs and then invest in those companies early and heavily. Returns would be fantastic, and the risk of feedback from your future-influenced actions would be much lower.
Chances are, the existence of a perfect trader would cause enormous shifts in how a market handles trading. This trader would, by default, be barred from trading, because her influence on the market would be staggering to the effect that it would influence the market itself. Even Warren Buffet has to temper things he says, so as not to accidentally push the market around.
But, assuming the FTC just decided to take a nap on the whole thing, I imagine those shifts in trading would so quickly dilute value that you'd end up with a system very similar to one we see now: machines doing the majority of the trading, but rather than on algorithms, more on observing Perfect Trader X.
If I were the trader with perfect information, I'd program my trading algorithms to lose (or at least not be guarenteed to win) 40% of the time. This would make you look merely like a incredibly fortunate trader, and not a perfect one. Just make sure that your algorithm guarantees an X% return per year.
On 3, I think it depends on your time-travel rules. Because the first thing that would happen is that people would flock to retool to produce the higher value commodities (if corn price > wheat price, people would stop making wheat and start making corn), causing a supply glut and price collapse.
I think based on "invent a time machine" the implication is that Perfect Trader X (I imagine him dressed like Racer X) would make a trade, then gather future information based on his latest trade, then make the next trade.
1) Would it be against current rules to trade on this information?
2) If someone did use this machine surreptitiously to their own gain, how quickly will they approach owning 100% of everything?
3) If the entire data set of future prices were made publicly available, what would happen to markets? I mean, exactly, what would happen to stock prices?