Tuesday, 27 October 2009

Learning to love insider trading

Donald J. Boudreaux suggests we should be Learning to Love Insider Trading. Writing in the Wall Street Journal Boudreaux points out that
Far from being so injurious to the economy that its practice must be criminalized, insiders buying and selling stocks based on their knowledge play a critical role in keeping asset prices honest—in keeping prices from lying to the public about corporate realities.

Prohibitions on insider trading prevent the market from adjusting as quickly as possible to changes in the demand for, and supply of, corporate assets. The result is prices that lie.

And when prices lie, market participants are misled into behaving in ways that harm not only themselves but also the economy writ large.
I have never really understood the problem with insider trading. Letting informed people trade on their information just makes that information available to everyone in the market. Why not set up a situation where companies have to say whether or not they will allow insider trading in their stocks, then the market can price this information into the stock price of that company. If you don't like insider trading don't buy the stocks of firms that allow such trades.

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