March 14, 2004
LET'S HEAR THE WHISTLE:
Insider trading: It's a good thing (Jascha Hoffman, 3/14/2004, Boston Globe)
Insider trading, defined by the SEC as the use of "material, nonpublic information" in stock sales, was first outlawed in the United States in the wake of the stock market crash of 1929. The rule went unchallenged -- and unenforced -- for decades. But soon after the first insider-trading conviction in 1961, economist Henry Manne stunned the corporate law crowd by arguing that insider trading, though harmful to some investors, should be legal nonetheless.First, Manne argued, insider trades would make a company's stock more quickly reflect the company's actual value, making the market more efficient. The canonical example is Texas Gulf Sulphur Co., whose managers gobbled up the company's stock in 1963 and `64 before announcing they had struck ore in Canada, inflating their share price with their own demand -- and enriching fellow stockholders -- well before the good news was released.
More importantly, Manne saw insider trading as a form of incentive compensation, a way to turn rule-bound managers into "corporate entrepreneurs" who would want to create more good news for their companies so they could trade on it.
Don Boudreaux, chairman of the economics department at George Mason University, takes Manne's argument a step farther, claiming that insider trading can actually fight corporate crime by serving as a silent form of whistleblowing. If insiders who knew about malfeasance were free to sell their company's stock short, Boudreaux claimed in a recent interview, the resulting decline in share value would serve as a distress signal to investors, and might eventually encourage a takeover.
Why not just combine insider trading with public disclosure? Insiders could be allowed to trade provided that they publicly disclose the material information upon which they are trading a day or two in advance. It's obviously a more efficient way of revealing a company's true value, but avoids the unjust enrichment (or impoverishment) problem. Posted by Orrin Judd at March 14, 2004 10:44 AM
Why not just combine insider trading with public disclosure?
Because requiring "public disclosure" would contain the same essential problem that current "insider trading" laws do: It would violate freedom.
We live in America. Land of liberty, etc. Remember? Let the marketplace sort itself out, just as it does at every flea market and garage sale and clothing shop each day.
Posted by: Thaleewack at March 14, 2004 12:14 PMSet up a safe harbor regime for trading-- if you think you have inside information, and wish to trade on it, you disclose it, with your name attached and in advance, and by doing so, cannot be prosecuted for insider trading.
Sure, the disclosure will be seconds before, but that's just an incentive for writing new kinds of analysis software.
Of course there's the problems of rumors and privacy, but there would be so much conflicting information floating around that it will all cancel itself out, especially if we took lying and perjury consistently seriously and not selectively. And as with any other such rule-bases solution, people will figure out how to game the system and test the loopholes. Welcome to human nature-- the one thing impervious to engineering.
Thaleewack:
Ever work in a clothing store? You aren't allowed to hide stuff from customers on Tuesday just so you can buy it youself when it goes on sale on Wednesday. You can buy it on Wednesday though.
Freedom requires trust, which makes the libertarian argument for duplicity self-destructive of freedom.
Posted by: oj at March 14, 2004 12:51 PMYou aren't allowed
Not allowed by whom?
You ever walked the streets of New York? Ever see people peddling shirts or hats? They can sell what they want when they want. They can sell at whatever price they want. They can hold back merchandise if they want. Just as any prospective buyer can hold back their own merchandise -- their dollars.
"Freedom requires trust"? What in the world does that have to do with anything? In any case, any regulation of freedom is an encroachment of freedom, which means it thus stops being freedom.
"Live free or die" -- I guess you guys don't really take it seriously up that way anymore, do you? You know, that motto wasn't a joke. It was a serious assertion. People like you, people willing to tinker with freedom here and there over the past two centuries -- nipping and tucking it where it suits you, in the name of arbitrarily engineering some better scenario in some given instance -- have turned it into a joke. "Live free or die" is now some rusty old anachronism that a bunch of old guys said a long time ago. It means nothing to you now.
Yes, there's no such thing as freedom. Those folks either remit taxes to the government or they're criminals.
But the freedom you propose is an illusion. One that those old guys found abhorrent:
In questions of power, let no more be heard of confidence in man but bind him down from mischief by the chains of the constitution.
-Thomas Jefferson
Explain to me again why I want my retirement money transferred from the crooks in D.C. to the crooks in N.Y.
Posted by: Harry Eagar at March 14, 2004 8:16 PM10% a year vs. 1%
Posted by: oj at March 14, 2004 9:06 PMAnd then when Enron or whoever can't continue to manipulate the market, the insider traders pull out, earn millions, and you're stuck with a nice -100% on your investment.
Posted by: Chris Durnell at March 15, 2004 10:54 AMPeople should have known that natural gas was 'tanking' as an investment by the spring of 2001. Enron employees who put 100% of their retirement in Enron stock made a huge mistake, borne of greed. The restrictions on their ability to move assets out (while the big dogs were selling) was wrong - but when they checked "100%" on their paperwork, the bankers in NY didn't make them do it, and frankly, neither did Kenneth Lay or Jeffrey Skilling.
Posted by: jim hamlen at March 15, 2004 3:44 PM