Insider Trading: Friend or Foe

Insider Trading – A harmful crime against an unknowing and vulnerable public? Or, a new medium for transparency and competition in a rapidly evolving financial market begging for reform? Either way, we should be looking at it from a different angle.

This weekend’s article in The Wall Street Journal titled “Learning to Love Insider Trading”, makes the argument (rather compellingly) that enforcing insider trading as a crime is not only subjective and unfair, but harmful to the market (I highly recommend you read the article here).

But this post isn’t an argument for or against the legalization of insider trading. It’s an argument for a different problem solving philosophy. An approach that the WSJ article uses to deconstruct preconceived notions regarding the legality of insider trading. And, it’s the exact same approach we SHOULD be using to address our current flaws in the financial market regulatory system. I’ll explain.

One of the article’s main arguments for legalized insider trading can be paraphrased as so:

Persons taking advantage of, and acting on, insider information enable markets to react faster by increasing transparency, resulting in truer, more timely asset prices. This protects, not harms, shareholders. For example, if you sold securities based on your inside information of unscrupulous company management, security prices would more accurately reflect the true mismanagement of a company – protecting shareholders from disasters like Enron.

The argument touches on a fantastic point. Which is . . .

Our approach for increasing financial market stability and protection SHOULD be through increased transparency and competition, NOT more government regulation and oversight.

The consequences of the last year will force a change in the way we regulate our financial system and protect the health of our economy. However, thus far, the suggested solutions have focused on increased government regulation of market activity and intervention of company management. This is false logic.

The flaws in our current system do not justify the condemnation of the free market concept, nor do they suggest that our financial system will work better with a government appointed “czar” at the helm. It simply means we have not yet perfected our implementation of the free market equation.

We should be reviewing our current system of rules and regulations and asking the tough questions about why these exist in the first place? How can we adjust our current laws to let natural market forces push us towards greater stability and protection?

If deconstructing federal laws like insider trading can promote greater market efficiencies and help sustain market self-regulation, why do we insist that more federal protection is the answer? Can’t this be an example of “less is more”?