No Tipping


Most people's eyes, including mine, glaze over immediately at the mention of anything so boring as capital market theory. But Congress is about to wage another war as costly and futile as the war on drugs. Before we allow our government to put citizens in prison for 10 years and fine them millions of dollars, all of which is contained in the latest insider trading bill passed by Congress, we should reconsider whether insider trading should even be illegal.

Some analysts believe insider trading is actually good for the economy. Share prices are supposed to reflect the value of a company. By trading on their secret information, insiders might make this happen more quickly.

Nor is it clear whether other investors are made better or worse off by insider trading. Share prices rise when insiders start buying. Some other investors lose because of this, but some gain. There is no way to measure the amounts of these losses and gains. And some economists think insider trading makes price changes more gradual and smooths fluctuations in stock prices.

Indeed, most of what falls under the SEC's ethereal definition of this heinous crime is perfectly legal for every product except securities. If I buy a car or a toaster, and if I know more than the seller about the future value of these products, that's not a crime. It's smart shopping on my part. But if I buy shares of stock in a company that owns nothing but these same cars and toasters, suddenly I could be liable for fines and prison.

Certainly company insiders should be prosecuted under existing fraud laws if they produce false news, and perhaps also if they profit on price changes after deliberately harming their companies. But almost all insider trading is buying or selling on valid information that others do not yet have. That is as harmless, and in many ways as beneficial, as trading by outsiders based on shrewd acumen that others do not have.

Some analysts disagree. But happily there is no need to settle this debate in order to know the proper government policy, which is to leave inside traders alone. The government should let private stock exchanges decide for themselves what rules to impose on insider trading and how to enforce those rules. Baseball fans can argue endlessly about whether the major leagues should have a designated hitter rule, but the government need not be concerned. American League owners can make up their own rule and enforce it against violators. National League members can make up their own rule. The stock exchanges should be free to do the same with regard to insider trading.

People justify the government's involvement on the grounds that investors will not put money into the market if they think they might get shafted by some insider. It is good for the economy, according to this argument, when companies find it easy to raise capital. But the corporations that use the stock exchanges for raising capital have combined assets of.. .what, about a bezillion dollars? They can afford to hire a few securities umpires of their own if they deem it in their collective best interest. Their individual portions of this cost will be tiny.

Think of SEC Chairman David Ruder stopping to get his shoes shined. Every year the shoeshine man gives up part of his meager earnings in taxes so that Ruder can go to his nice office and assist Exxon in raising capital. Trust me. Exxon will do okay without taking money from shoeshine men.