Insider trading is not wrong

Reader comment on: Insider Trading at the Supreme Court

Submitted by Harry Binswanger (United States), Nov 13, 2014 19:37

On what theory is insider trading even wrong, let alone a crime? It's up to the shareholders to decide whether and under what conditions their fellow shareholders and their employees (including top executives) may trade in their stock. They may well agree that allowing sales and purchases by the same is a proper perk.

In general, information is intellectual property. There should be competition to acquire it. Those who, without theft, learn the facts first ought to benefit by being first.

As long as the information is not stolen, no one is harmed by those who buy and sell with superior knowledge. You don't want to compete with their superior knowledge? Then don't. Don't make short-term trades that depend upon such swings.

When there's a material change in the company's prospects, for better or worse, not every trader can get the same benefit from it. The current theory is: no one acts until everyone is told. Okay, everyone is told. Now what? The stock jumps up or down. Some gain some lose. There's a rush to buy or a rush to sell. The cause is the facts that changed, not who acted first. If Joe, an insider, acquires knowledge of those facts before Bill, an outsider, does, why is it wrong for Joe to act on his knowledge? It isn't.

Take the "worst" case. The CEO gets the news that something terrible has happened such that the company is worth half what it was (bankruptcy is a special case, let's put that aside). If his employment contract doesn't forbid it, why shouldn't he be able not only to sell but to sell short? There's no representation made to the other party in selling your stock. It's pre-eminently an arms-length transaction. The buyer pays twice what he would have paid had the knowledge been publicly available. So what? That's the risk that the buyer of stocks takes when he buys. Paying more than he could have, just a day later, is not being harmed. It's not a good thing, but it's not having something that was yours by right taken away from you. But that's all that the law should protect one from.

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