We are very close to considering the debate over insider trading resolved in favour of the long standing conclusion from academic literature that it does not result in harm to any group of investors.
Our post inviting comments explaining why we were wrong on this provoked a hundred comments. But not one of them succeeded at explaining harm from insider trading.
A common misconception about insider trading seems to be that it typically involves the upper management of a company front-running bad information or with holding information while they make trades. This is why some readers describe companies policing insider trading internally as “foxes guarding the hen house.”
Fortunately, this is simply is a factual mistake. Most illicit insider trading is committed by lower level employees or outsiders who gain information from lower level employees. Mandatory disclosure rules for top executives mean that insider trading is not a particularly favourable tactic for upper management. In fact, upper management tends to despise insider trading and always cooperates with investigations.
A few of our best commenters raised important arguments involving certain trading strategies but all of them fell prey to a common mistake: looking at a single trade in isolation rather than as part of a more broadly diversified investment strategy that includes a series of trades over time. When looked at as a part of a greater whole, the harm vanishes.
But before wrapping this up for a final time, we will once again invite readers to prove that we’re wrong. Believe it or not, we’re hoping you come up with something really mind-blowing here. We’re contrarian enough that we would love to blow away the academic consensus and participate in the discovery of a new basis for insider trading bans.
So let us have it. Explain the harm to investors from insider trading. We promise that if someone gives a killer explanation, we’ll devote a whole post to praising their work.
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