WaPo's Matthews: Legalize Insider Trading

Tuesday, 30 Jul 2013 08:02 AM

By Michael Kling

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At least some say insider trading should be legalized, writes Washington Post columnist Dylan Matthews.

Insider trading can help markets operate more efficiently and prevent fraud and scandals, he argues.

With their special knowledge, insiders are best positioned to price their company's stock accurately. If a company is a fraud hiding behind cooked books, insiders would reveal that by selling.

Editor’s Note:
Put the World’s Top Financial Minds to Work for You


Enforcing the ban and separating legal and illegal insider trading is futile, Donald Boudreaux, an economics professor at George Mason University, writes in an article for The Wall Street Journal.

"Not only do insider trading prohibitions slow economic growth, promote corporate mismanagement and discourage investment diversification, their application also is unavoidably biased," he asserts.

Boudreaux noted that Henry Manne, an economist at George Mason University, believes the Enron and Global Crossing scandals could have been avoided if insider trading was permitted.

"I don't think the scandals would ever have erupted if we had allowed insider trading," Manne once said in a radio interview, "because there would be plenty of people in those companies who would know exactly what was going on, and who couldn't resist the temptation to get rich by trading on the information, and the stock market would have reflected those problems months and months earlier than they did under this cockamamie regulatory system we have."

The main question, according to Matthews, is who is hurt by insider trading." The uninformed investor buying or selling stock from an informed inside. But individual investors shouldn't be trying to beat the market in the first place. That's a fool's errand. They should be investing in an index fund, he explains.

Legalizing insider trading would send that message home and help discourage people against trading stocks of individual companies. Using inside information creates an unfair advantage, but stock trading is unfair anyway. Banning it only creates the illusion of fairness, as a typical investor has no chance against the likes of a Steve Cohen, founder and manager of SAC Capital Advisors.

A study by the Atlanta Federal Reserve found that insider trading makes markets run more efficiently, Matthews asserts.

The law bans only trading based on inside information. It does not prohibit insiders from holding a stock that they'd otherwise sell.

"That kind of 'insider non-trading' is totally legal, but basically equivalent to insider trading," writes Post columnist Dylan Matthews. "Allowing one and not the other is bizarre and inefficient."

Enforcing the bans is relatively new, he adds. Enforcement didn't start until about 1961 in the United States and 1980 in the United Kingdom. Other countries are much less stringent. Yet there's no indication the bans make markets in the United States or the United Kingdom better.

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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