Don Boudreaux’s WSJ article on “insider trading”

by Sandy Ikeda

Congratulations to Don Boudreaux for his article debunking insider-trading regulations, “Learning to love insider trading,” which covers the entire front page of the Weekend Journal section of this morning’s paper.

Prohibitions on insider trading prevent the market from adjusting as quickly as possible to changes in the demand for, and supply of, corporate assets. The result is prices that lie. And when prices lie, market participants are misled into behaving in ways that harm not only themselves but also the economy writ large.

With last week’s arrest of Galleon hedge-fund founder Raj Rajaratnam, insider trading has been very much in the news.  And now Don has done an excellent job of using and extending arguments originating with Henry Manne to help us understand just what is and isn’t at stake.

One thought on “Don Boudreaux’s WSJ article on “insider trading”

  1. Interesting, but I have some suspicion of the argument that insider trading necessarily helps the market find the “true” value of an asset faster. I’m sure it *can* do this (to the extent “true value” is even meaningful), but it also makes it easier for insiders to manipulate prices. Goldman Sachs, for example, appears to do the following: (i) it conducts an analysis that determines some asset in underpriced, (ii) it calls together a few strictly limited “friends” who are given this info, and then after they’ve had time to act on it (iii) GS publishes this info to its subscribers.

    I’m not sure GS has any special knowledge of what is underpriced. It seems as likely to me that it’s simply creating demand, and letting the most-well-heeled of its subscribers in on the deal…for an extra fee, of course. Apparently this activity doesn’t qualify as insider trading (or maybe its just that GS gets its usual “bye” from the feds), but it does suggest how insider trading could be used to screw up the market. An executive could intentionally wreck a company and profit from it — essentially what happened with Enron, in fact.

    To me, this issue is ambiguous. Government has no good solution, and has inferior information and twisted incentives, and can use this power arbitrarily, e.g. against smalltime billionaires with funny names instead of the real crooks at GS. But the alleged benefits of insider trading seem largely a chimera. I don’t feel much sympathy for Rajaratnam, anyway.

    (I already took Boudreaux to task on this issue on his blog, BTW, although this was in passing while congratulating him for winning the Szasz Prize.)

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