Should Laws Against Insider Trading Be Repealed?

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When it comes to Insider trading you’re entitled to rely on the best and most timely information so long as you do nothing. Such a rule is not likely to improve private investment decision-making or promote more efficient markets, expert say. And the goal of insider trading laws, which is to promote a fair stock market, is misguided. As everyday stock market participants trade securities based on incomplete information. In nearly every transaction, one party has superior information than the other.  

Furthermore, it’s only possible to enforce insider trading laws when a trader decides to buy or sell a security. But the decision to not trade a security is sometimes equally important. If you are inside a source at a company whose stock you don’t own gives you a peak at a financial statement, and it’s disappointing, you’ll decide not to buy that security. And that decision is illegal, but can never be proven.  

Insider trading laws prevent the market from reflecting all available information about securities. By preventing those who know more about a stock from acting on that information, you impede the natural tendency of markets to set a fair price. 

Insider trading deprives markets of some pertinent information, allowing insider trading would weaken other pillars of a modern securities market. Unfortunately, keeping people ignorant is economic folly. We make more bad decisions, and markets take longer to adjust. These are just some of the arguments that have been made over the years by those experts and “know-hows” of the trading industry. 

These arguments are not new. Ever since 1934, when insider trading became illegal in the United States, theorists have argued about the merits of such restrictions. But what may come as a surprise to many is that even though insider trading has technically been illegal since the 1930’s, regulators have only been enforcing the law with vigor for the past 30 years.  That changed radically in the 1980s, when several new laws were passed to stiffen penalties for insider trading, and regulators started bringing many more cases against Wall Street.

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