The Anti-State Blog

 There is no reason why insider trading should be illegal. It should be prohibited, but outside of government regulation it would be adequately restricted. All securities firms (such as brokerages and investment banks) have policies forbidding their employees from insider trading. All large public companies also have such policies.

One could argue that the reason those policies exist is because of the government regulation, and that would be correct. But the regulation is no longer necessary (if ever it was necessary) to prevent insider trading. Who is harmed in insider trading? Anonymous traders who sell to those with insider knowledge, certainly. Also, the companies involved, such as investment banks, suffer a loss of reputation when their employees trade on insider information. That loss of reputation is a definite, if neither concrete nor easily quantifiable, tort. It is a theft. Therefore, firms that discover employees who trade on insider information would fire those employees and then sue them for damages–a reasonable amount would be treble the unjust profits of the insider traders.

What about the firms themselves? What if they made a decision to trade on insider information? A small consultant on a large acquisition could easily justify the cost of reputation in light of potentially huge profits. But the trading on inside information also harms anonymous traders in the stock and stock options of the traded companies. So it would be in the best interests of the stock exchanges to prevent insider trading. If they did not do that, their reputation would suffer and traders would use an exchange that banned insider trading. The exchanges (such as NYSE and NASDAQ) would thus formally prohibit insider trading and would be liable if to the outside traders if it happened.

Overall, the market would regulate itself, insider trading would remain infrequent, and those employees of the SEC could go find productive jobs. The world would be a better place.

[originally published 30 May 2007]