Thursday, October 22, 2009

Legalize Insider Trading

James Altucher makes the case:

  • The more information in a market, any market, the more efficient prices become. If informed investors start buying or selling based on privileged information, asset prices will rise to their "correct" level. For instance, in the Hilton case, we probably would have seen a smooth progression of the stock price from 33 to 45 over the prior month as talks progressed, instead of the spike in just one day.

  • Fraud will be exposed earlier. This is a very key point to the argument. Enron is an example where tens of thousands of investors got burned because they were piling into the stocks during the later stages of its fraud. If insiders were selling we would've seen a much swifter move down, and probable fraud exposed.
  • Companies will either become more transparent, to keep the retail investor happy, or will themselves enforce secrecy rather than being complacent with the idea that the law somehow protects their secrets.

For more on legalizing insider trading, see Larry Elder's interview of Professor Henry Manne.

1 comment:

  1. Wenzel,

    That's the utilitarian case (and a good one). The rights-based case is that insider trading is a victimless crime. No one is deprived of their rights as a result of insider trading because no one has a right to get a particular price for or receive a particular piece of information about any given security.

    No force, no fraud... no crime.