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)

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