Wednesday, July 13, 2011

Should we allow insider trading?

"Insider Trading" sounds like something that should obviously be illegal.

The problem is that outlawing IT and enforcing the law rigorously ensures that share prices (or whatever the asset is) do NOT...repeat NOT...reflect all the information available about their future profitability. This argument is quite persuasive to me. Our man Don Boudreaux podcastrates the ideas pretty well.

Besides, the law now is unenforceable.

LeBron is not so sure.

Now, this study. Interesting.

Bubbles and Information: An Experiment

Matthias Sutter, Jürgen Huber & Michael Kirchler
Management Science, forthcoming

Abstract: Asymmetric distribution of information, although omnipresent in real
markets, is rarely considered in experimental economics. We study whether information about imminent future dividends can abate bubbles in experimental asset markets. We find that markets with asymmetrically informed traders have significantly smaller bubbles than markets with symmetrically informed or uninformed traders. Hence, fundamental values are better reflected in market prices — implying higher market efficiency — when some traders know more than others about future dividends. This suggests that bubbles are abated when traders know that a subset of them have an edge (in information) over others.

Sounds to me like an argument for allowing at least limited insider trading. Of course, fraud and deception (rumors and lies) would still be just as illegal, and common, as before.

(Nod to Kevin Lewis, who has been an insider for years)

1 comment:

Tom said...

Limited insider trading? The current law is
(a) unenforceable, due largely to the complexity of the acts deemed "insider", and
(b) counter productive, since it results in hiding pricing information, and
(c) immoral, causing a physical attack on people who merely act on information they legitimately posses.

I wonder what kind of "limit" you propose that would not exacerbate all three problems.