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March 2, 2008 | by  | in Online Only |
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Insider Trading

By today’s logic those that dabble in insider trading should be thrown into jail along with those who murder and brutally rob people. In fact it seems such a widely accepted view that when the likes of Marta Stewart are caught many people praise the state’s effectiveness in being able to stamp such a “horrid” crime out.

Is it really true that those who indulge in such activities deserve to spend time with those who actually restrain/destroy individual’s liberty. Jim Cox writes a very interesting article on the subject.

A summary of Cox’s four key points:

Firstly, the stock market system is set up on the basis that financial gain is made on the foundation of superior knowledge. Virgin Blue is successful because it knows how to run an airline better than others. Companies’ competitive edge is about having superior knowledge and keeping it secret.

Secondly, what are the effects of insider trading? An original investor wants to sale their stock – it is currently worth twenty dollars. They sell to investor A and straight after the sale a take-over bid is successful and the stock is now worth fifty dollars. The original investor would have sold to investor A regardless if he had insider knowledge or not. In a world were insider trading is banned, investor A is not allowed to make the purchase. Thus, lucky but ignorant investor B would make a quick thirty. Why is A’s knowledge an illegitimate way to earn money but B’s ignorance a legitimate way? Reprimanding the knowledgeable for being knowledgeable and rewarding the ignorant for being ignorant – hardly attitudes taught in any other area of society.

Thirdly, there are beneficial outcomes when insider trading occurs. Insider trading reveals to the world, by way of higher stock prices, that the current stocks are undervalued. This helps pass information much more quickly than if insider trading laws are effective. Faster information is a good thing by all accounts.

Fourthly, insider trading is a victimless “crime”, the only harmful “insider” knowledge is where the knowledge is used to breach contract or expressed trust. There are ways to deal with this in civil law already.

It seems timely that the laws around insider trading should be looked at again.

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