Note: I do not mean we should legalize the selling of information that companies deem as private. This should be punished and treated as a form of theft. Committing that crime is not at all synonymous with buying stocks based on something you personally know.
People who invest based on non-public knowledge (whether it be Senators, corporate directors, or even simple employees of a company) are susceptible to conviction. Insider trading is seen as corrupt and damaging. Under our current circumstances, it most certainly is. But if it were made legal for people to trade securities based on inside information, would we really see such a harsh effect on the economy?
The answer is no. While some may consider insider trading fraud, it, in reality, is neutral to the economy when people have the freedom to do so. If I work in a department like Annuities at Prudential Insurance, I may know a bit more, from hearsay or from my work, than the average-Joe. If I act on that and purchase equity securities, why is it considered a crime? Why is it considered a crime for directors to purchase stock in a company based on deals they’re making for the business? Look, it may line the pockets of employees (which isn’t necessarily bad), but let’s look at the flip side.
Right now, our markets are overflowing with credit. As always. This credit is often used to purchase stock. Most people invest with 401ks in companies they know very little about. We call that “speculation”, right? The more we discourage people to invest based on knowledge they have, the more we encourage speculation in the stock market. And time and time again, we have seen speculation lead to harsher downturns in the market.
Impedes Ability to Commit Fraud:
I’m sure very few people forget the fraud Enron committed. Now let’s think about this: Enron was ripping off its investors and clients left and right. Insiders would have sold much more and everyone would have noticed the shock that this selling would have had much sooner. It generally provides for a more transparent company, rather than closed off to the public.
A Concern Regarding Inside Trading:
Senators and Representatives. A number of people in Congress trade their securities based on closed-door meetings they have about regulations. I’m sure Cabinet members are much more guilty of this as well. This is no news, really. I fear that the legalization of insider trading would permit far more personal influence on decisions at committee meetings. In other words, Congressmen and women would legislate and push the markets around to allow for their portfolio to grow.
What would need to happen is the passage of an Executive Order banning Congressmen and women from owning stock of companies. Period. It would remove some corruption I think, and would put public service closer to the top priorities of politicians. It wouldn’t fix the issue of companies buying out our elected officials at all (it could still be done with donations or intermediary parties), but it would definitely help.