The Case for Small Government

A Libertarian Perspective on Economic and Social Policy

March 28, 2006

Congress and Insider Trading

Democratic lawmakers apparently want to ban insider trading by members of Congress and their staffs. Perhaps unsurprisingly, these groups have so far been exempt from the general prohibition against insider trading.

Rather than broadening the ban, however, Congress should repeal it entirely. The ban is problematic on efficiency and equity grounds.

The ban is inefficient to the extent it delays release of relevant information, since this means delayed adjustment of stock prices. Markets cannot allocate resources properly unless they know which companies are doing well or badly.

The ban is inequitable because some corporate executives trade on inside information despite the law. Thus the ban rewards dishonest insiders.

36 Comments:

At 9:09 PM, Anonymous Paul said...

Also, only 2 types of the 4 types of insider trading are illegal (selling when you know something bad and buying when you know something good). It is legal to hold onto stock because you know good things will happen, and legal to not buy stock because you know bad things are ahead. Insiders thus tend to hold onto stocks while they know good things are ahead, and sell when they become neutral (they are not allowed to wait for them to be bad because then they get accused of insider trading anyway).

 
At 11:01 PM, Blogger LP Mike Sylvester said...

I agree, all Insider Trading laws should be repealed...

There are so many laws that should be repealed they are hard to list here...

Mike Sylvester

 
At 2:36 AM, Anonymous erik said...

I find it very difficult to justify allowing the executives of a company getting rich off what is often their inept management while leaving the workers to face the consequences of tanking stock prices.

 
At 5:49 AM, Blogger Mike Huben said...

Here we see a typical abuse of consequentialism: stacking the deck.

Nowhere does Prof. Miron mention the economic purpose of insider trading laws. Their purpose is to encourage market transparency, one of the critical assumptions of free market efficiency. If insider trading is legal, that will encourage hoarding of insider information to retain the insider advantage as long as possible.

Not only does economic theory suggest that insider trading reduces efficiency, but a fair amount of research based on stock market rule changes and enforcement suggests this is a measurable real world effect.

The "inequity" argument Prof. Miron raises is silly. Bans against murder reward dishonest murderers by his logic. So should we legalize murder?

 
At 6:27 AM, Anonymous KAS said...

I hate to agree with mike huben given his customary nastiness, but in this case I have to.

I have on numerous occasions had access to information that was not in the public domain...early knowledge of substantially higher than expected earnings, acquisitions at a premium to the currently traded price. Had I acted on that information I would have enriched myself and made a loser of someone on the other side of the transaction. I could chosen not to act for ethical reasons. But that is harder to do if your action is legal and the party on the other side of the transaction is faceless.

What eliminating insider trading laws would do, however, is greatly reduce my confidence in the financial system. Already we know that it is gamed to a certain extent. This would just set us all up to be suckers.

 
At 8:33 AM, Anonymous Rich Aucoin said...

The late, great Harry Browne explained the truth about insider trading in his article titled "What the Martha Stewart Case Means to You."

Insider trading is completely victimless.

So anyone who believes that all victimless crime laws are unAmerican should favor repealing "insider trading" laws.

www.harrybrowne.org/articles/MarthaStewart2.htm

 
At 4:03 PM, Blogger Andres Hernando said...

I fail to see why insider trading is a victimless crime. If you sell stocks knowing that bad news are ahead, you're selling something to someone at a price that you know for sure is higher than its real price. If you buy stocks because you know something good about that firm, you're buying something from someone at a price that you know is lower than its real price.

In both cases there's a clear victim: the less informed party is loosing part of her wealth to the more informed party, without receiving any compensation. I think that's called stealing.

Also, if all insider trading laws are repealed, wouldn't that simply force a lot of people with little or no access to privileged information to leave the market? Active trading is a zero sum game. Who would like to play a game like that in an unleveled field?

Andres.

 
At 4:44 PM, Blogger James said...

Insider trading laws can't improve transparency, but preventing trades can certainly hurt transparency. Once people trade on insider information, that information becomes public in the form of a price change.

 
At 10:03 PM, Blogger Bob Schubring said...

The most significant problem with the insider trading statute is that nowhere does the statute define what "insider trading" is.

So, for example, when Martha Stewart offered to stop paying the customary cash kickbacks demanded by the executives of K-Mart, and to substitute the provision of advertising price cuts in place of cash kickbacks, mysteriously she became guilty of the undefined crime of "insider trading".

Whether the stock market gains or loses efficiency or the consumer gains or loses confidence are matters of secondary public concern, to the right of the accused to know what conduct is legal and what conduct is proscribed. Leaving a statute on the books that can be interpreted, ex post facto, to make a crime of the actions of a person suddenly-unpopular with the influential, leads us in the direction of political thuggery and away from the rule of law.

Why wasn't the bankruptcy judge in the K-Mart case charged with being an accessory to insider trading, when she granted a motion to destroy the ownership rights of every existing K-Mart stockholder, and allow K-Mart's executives to issue new shares of stock on the NASDAQ?

This law is bad and dangerous, not because of minor effects on the efficiency of markets, but because it fosters corruption by encouraging malicious prosecution.

 
At 12:53 AM, Anonymous Anonymous said...

Professor Miron -

I enjoy your blog and find your views thought-provoking. In future posts, I would appreciate a brief summary of the views you are opposing. Why (in your view) do proponents consider restrictions on insider trading reasonable? In most of your other posts you provide such background, but I find your arguments more difficult to follow when you do not.

 
At 9:25 AM, Blogger James said...

anon,

The main objection to insider trading is that one party (the insider) has more knowledge about a company and is able to use that knowledge to make money at the expense of those who have less knowledge.

The site that huben links to makes a rather novel argument against insider trading. From the article, "Countries with stricter insider trading laws and enforceable criminal sanctions are likely to have stock prices that better reflect a company's performance, according to new research at U-M." I would caution against trying to infer the direction of causation strictly from data.

 
At 12:09 AM, Blogger Neil Sinhababu said...

Is there any way to prevent tradable insider information from being given away as a bribe to elected officials? I don't know whether this would be covered in existing laws against bribery.

 
At 9:12 PM, Anonymous electronic day trading said...

Great blog.

Regards,

Mini Dow Daytrader
electronic day trading
http://www.daytradingcourse.com

 
At 4:22 PM, Blogger Emini Day Trader said...

Nice blog. Keep up the good work.

Regards,
Emini Daytrader
QQQQ day trading
http://www.daytradingcourse.com

 
At 5:43 PM, Blogger Emini Day Trader said...

Interesting blog. I can see that you've done a lot of work on it.

Regards,
Emini Futures Day Trader
learn emini trading
http://www.daytradingcourse.com

 
At 7:26 PM, Blogger TradingCourses said...

Great blog. Nice job you've done here.

Sincerely,
Stock Trader
ETF trading

 
At 8:09 PM, Blogger TradingCourses said...

Good info. Thanks.

Regards,

ETF Trader
ETF trading

 
At 9:32 PM, Anonymous futures trading said...

For a list of online futures trading brokers and a profile of an online
futures broker recommended by others visit futures trading

Futures trading and commodity links. Features tools, indicators and charts
future trading

Futures Truth Top 10 Trading Systems
future trading system

 
At 1:33 PM, Anonymous Anonymous said...

Keep up the good work » »

 
At 11:03 AM, Anonymous Anonymous said...

Informative blog. Thanks.

Regards,

Emini Futures Daytrader
day trading stock pick

 
At 6:00 PM, Anonymous Learn ETF trading said...

Good info. Thanks.

Regards,

Stock Trader
Learn ETF trading

 
At 2:13 AM, Anonymous Anonymous said...

Keep up the good work »

 
At 7:58 PM, Anonymous Anonymous said...

Good info. Thanks.

Regards,

Emini S&P 500 Futures Daytrader
emini future

 
At 10:44 AM, Anonymous Anonymous said...

Informative blog. Thanks.

Regards,

Emini Futures Daytrader
elliot wave

 
At 4:51 PM, Anonymous Anonymous said...

Good info. Thanks.

Regards,

Mini-DOW Futures Daytrader
day trading system

 
At 9:46 AM, Anonymous Anonymous said...

Good info. Thanks.

Regards,

Emini S&P 500 Futures Daytrader
day trading seminar

 
At 9:24 AM, Anonymous Anonymous said...

http://www.adquity.com

Classifieds for our community. Buy, sell, trade, date, events... post anything. Adquity Classifieds.

http://www.adquity.com

 
At 6:28 PM, Anonymous Anonymous said...

show trade

 
At 3:16 PM, Anonymous Anonymous said...

This helps explain how a middle class person can enter congress and leave several years later a multi-millionaire.

 
At 12:41 PM, Anonymous Anonymous said...

Download Online Casino tyuueooru
http://stonewalljacksoncarnival.org/ - Play Casino Games
Additionally, you don?t have to stand out of your casino till the clock hits its opening time because a majority of online casinos are accessible 24/7.
[url=http://stonewalljacksoncarnival.org/]Play Casino Games[/url]
Additionally, you don?t have to stand out of your casino till the clock hits its opening time because a majority of online casinos are accessible 24/7.
Top Online Casinos
2.

 
At 4:23 PM, Anonymous Anonymous said...

Company Voluntary Arrangement CVA for a company is not an easy way out of debts, contrary to popular belief. However, there are also significant loopholes that will still allow the Inland Revenue and Customs and Excise to collect tax bills, even if a CVA for your company is filed and discharged. You need to sit down with an insolvency auditor or a solvency practitioner for a free consultation or call our helpline for free, 0800 24 0800.
Company Voluntary Arrangement

 
At 8:33 AM, Blogger Maria said...

The ideal primary teaching resource should contain a variety of useful features. High quality teaching resources can be the difference between a constructive, attentive and content classroom and an unproductive and idle one.
Primary Teaching Resources

 
At 8:33 AM, Blogger Maria said...

The ideal primary teaching resource should contain a variety of useful features. High quality teaching resources can be the difference between a constructive, attentive and content classroom and an unproductive and idle one.
Primary Teaching Resources

 
At 11:58 AM, Blogger Moe Nawaz said...

UK Advice, nationally recognised as a business insolvency and business liquidation helper for business owners and company directors in UK, we arrange a meeting to your office or any place of work at no cost to you. Contact us today at our business liquidation helpline for free at 0800 24 0800.
Business Insolvency
Business Liquidation
Business Bankruptcy
Business Insolvency
Company Insolvency
Company Liquidation
Business Bankruptcy
Winding Up Petition
Company Debts
Pre Pack Administration
Business Debts
Insolvency Offices
Insolvency Auditor
Company Voluntary Arrangement
Birmingham Insolvency
London Insolvency
Manchester Insolvency

 
At 3:33 PM, Blogger Moe Nawaz said...

I like your post, the information in your post is quite good :), nice.. Thanks a lot... keep sharing:)
Mastermind Groups
Mastermind Coach
Mastermind Strategist
Time Management Skills
Business Growth Strategy
What is Mastermind Group
Why Join Mastermind Group
Mastermind Group Benefits
Business Growth Products
Business Coaching
Business Ideas
Business Coach
Business Mentor
Brand Strategist
Business Success Stories
Innovation Strategist
Business Growth Strategy
Business Success Stories

 
At 11:11 AM, Anonymous sports betting software said...

is a complicated issue but I think the ban is unfair

 

Post a Comment

<< Home