In Praise of Insider Trading?

Robert Day made a $200 million gift to Claremont a couple months ago — a landmark in higher ed donations. Now, he’s involved in an insider trading scandal.

An old post on The Economist blog asks, What’s wrong with insider trading?

Rather than simply forbidding trading on insider information, why not legalise this so called ‘market abuse’, and use it to improve the flow of information to the market?

As mentioned in the article, the Nobel Prize-winning economist Milton Friedman himself noted that "You want more insider trading, not less". Friedman argued that it will give people most likely to have knowledge about deficiencies of the company an incentive to make such deficiencies known. In other words, trading based on private information might benefit investors, as it stimulates a quicker absorption of new information into the markets, making them more efficient.

It is clear that insider trading continues despite vigorous enforcement of the existing regulations. This is because of the difficulties in detecting and prosecuting it. Further regulations will only add unnecessary complexity to market participants and eventually bind the already limited resources of enforcement agencies, which could be used more usefully.

(hat tip: Claremont Conservative)

4 comments on “In Praise of Insider Trading?
  • Insider trading is not at all bad ethics. Those who criticize it are slobs that don’t seek out or simply don’t know how to get it or where to look for it. It’s the economic equivalent of AWACS – an early warning system used in combat aviation, which signals a coming threat early on and ensures safety of people.

    That said, monetizing insider information is not without risks as is widely believed. Outsiders will just have to keep a close watch on unusual movements in volume/price of a stock, to know there’s something brewing. You’ve to join in at that instant to seek out what drives it and no matter you figure it out or not, to take a position – long or short – merely trusting your instincts, without waiting for validations. Now don’t you think the one with a risk appetite like that deserves to be rewarded, because there’s an equally good chance of his outlook going wrong?

  • To add to Krishna’s comment, the power of technology to help man sort through trends in information quickly makes laws and social rules against insider trading even more indefensible. Monetizing insider information involves risk, but that risk will just get monetized, as it should.

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