Sure enough, in the next chapter of Payback, Insider Trading, referred to by the author as "informed trading," is defended and its punishment is attacked. As a staunch critic of insider trading this defense took me back a bit, although in doing research I learned that many in fact oppose a crackdown on insider trading. Some quotes from the book:
"During the entire decade of the 1980s, the government never developed a theory of why insider trading was harmful or even a rationale for deciding whom and when to prosecute-or even of what, exactly, insider trading was. Neither the SEC, Congress, nor the courts have yet, up to the present day been able to define what constitutes insider trading."
"Insider trading is pervasive because it is frequently beneficial. Sometimes corporate executives want to disclose information but cannot do so directly. Disclosure can cause the information to lose its value. A firm may not be able to disclose the details of a promising new technology, for example, because it does not want to share this information with competitors. If corporate executives in possession of this information purchase shares and make a vague or partial disclosure ("we have good news but can't say just what"), stock prices will move in the right direction. Investors who see corporate executives putting their money where their mouths are more likely to believe what they say."
Fischel brings up an interesting point regarding the ambiguities surrounding the who, what, where, when and why of insider trading. However, difficulty defining an activity, does not render it acceptable. As an analyst, I take personal offense to insider trading. To take its hypothetical acceptance to the extreme, a world in which insider trading is rampant would render my honest efforts useless. Why would I spend weeks diving into the details of a company only to have some plant manager, or lawyer, or confidant trade ahead of me? Focus would switch away from detailed analysis of available public information and instead become a game of payoffs and the race to get the scoop. It is not a stretch for me to imagine "paparazzi photog" and "established international spy" as replacing "CFA" and "CPA" on the resumes of investors. With the now marginalized importance of historical fundamental information, there will be less scrutiny of public filings, which will lead to more abuse of those informational outlets, and more fraud on the part of executives.
The prohibition of illegal insider trading is a core principle that bounds together the self interested participants of our system, with the end result being generally efficient markets that the public generally has faith in.
Insider Trading Pros and Cons:
"What’s Wrong with Insider Trading?", Stephen Moore
"The Peculiar Prosecution of Frank Quattrone", John Tamny
"Insider-Trading Prohibitions Should Go out of Style", Donald J. Boudreaux
"Insider trading: It's a good thing", Jascha Hoffman
Thomas C. Newkirk - Associate Director, Division of Enforcement, SEC
"Why Regulate Insider Trading?", Stephen Bainbridge
"Daniel Fischel is Dean of the University of Chicago Law School. He is an economist, a partner in the preeminent law and consulting firm Lexecon, and co-author, with Frank Easterbrook, of THE ECONOMIC STRUCTURE OF CORPORATE LAW. He graduated from Cornell, Brown, and at the top of his class from the University of Chicago Law School, and served as law clerk for Supreme Court Justice Potter Stewart."
