Why Is Insider Trading Illegal?

May 12, 2008

The meme of the day, as admirably summed up by Paul Murphy,
is the question of why exactly insider trading is illegal, and whether
it should be. I seem to recall a trenchant column by Holman Jenkins in
the WSJ around the time of the Martha Stewart case arguing that it
shouldn’t be, but I can’t find it right now, partly because the WSJ
keeps on telling me that “search is momentarily unavailable”.

One thing which gets missed in much of the debate is the difference
between a civil and a criminal offense. Some companies, and their
shareholders, might conceivably want their employees to be able to trade on insider information, goes the argument
- and if that’s the case, then who are the authorities to come swooping
in and telling them that they can’t? Similarly, if a company doesn’t want its employees behaving in such a manner, it can contractually oblige them not to, and sue them if they do.

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