Belinda Gibson – deputy chair at ASIC – has a warning against insider trading in the AFR masquerading as an op-ed. Basically a don’t-do-it-because-we’ll-catch-you piece. Okay. Not sure why that is an op-ed and not just part of an interview in the news section. But this bit caught my eye:
Our intolerance to insider trading is fundamental to ASIC meeting its priority of ensuring markets are fair and efficient.
But here is the thing – insider trading makes markets more informationally efficient. For that reason many free marketeers are suspicious of anti-insider trading laws. That’s on the assumption that increased market efficiency is a ‘good’ thing. But there is a trade-off. Insider trading also makes markets less operationally efficient. So the question is – what is the net effect of insider trading?
This is an empirical argument because it is possible to generate theoretical arguments for and against insider trading.
Laura Beny has done some very interesting empirical work on the issue and finds that those markets with stricter anti-insider trading laws also tend to have more dispersed ownership, more informative stock prices and greater levels of liquidity.
Utpal Bhattacharya and Hazem Daouk have found that enforcing anti-insider trading laws lowers the cost of equity to firms.
So at the margin there is a trade-off between informational efficiency and operational efficiency. Anti-insider trading laws add value to investors and market participants.
Having said all that, however, it isn’t clear that having a dedicated government agency enforcing anti-insider trading laws is the most effective way of enforcing those laws. Nor is it clear to me that insider trading should be a crime as opposed to a tort.
Henry Manne still makes some powerful arguments against criminalising insider trading.