Insider Trading Is Really Common. Awesome!

A new
study finds that insider trading is extremely common. CNBC
Squawk Box co-anchor Andrew Ross Sorkin writes up the
findings: 

Now, a groundbreaking new study finally puts what we’ve
instinctively thought into hard numbers—and the truth is worse than
we imagined.

A quarter of all public company deals may involve some kind of
insider trading, according to the study by two professors at the
Stern School of Business at New York University and one professor
from McGill University. The study, perhaps the most detailed and
exhaustive of its kind, examined hundreds of transactions from 1996
through the end of 2012.

But is all
this insider trading really bad news? At Reason, we have a
long history of sticking up for insider trading, even making Martha
Stewart our cover girl after she got into hot water with the
Securities and Exchange Commission (SEC) in 2003.

That’s because insider trading is a victimless crime. Markets
run
on asymmetrical information. Stock prices bounce around because
investors are always doing their best to use their own superior
information for personal gain. So-called insider information is
just one kind of asymmetry, and not a particularly insidious
one. 

What’s more, insider trading tends to make markets more
efficient.
Here’s The Washington Post last year, taking a page
from George Mason economist Henry Mannes’ book: 

Markets work best when goods are priced accurately, which in the
context of stocks means that firms’ stock prices should accurately
reflect their strengths and weaknesses. If a firm is involved in a
giant Enron-style scam, the price should be correspondingly lower.
But, of course, until the Enron fiasco was unearthed, its stock
price decidedly did not reflect that it was cooking the books. That
wouldn’t have happened if insider trading had been legal. The many
Enron insiders who knew what was going on would have sold their
shares, the price would have corrected itself and disaster might
have been averted.

And what this
new study from Patrick Augustin of McGill University, Menachem
Brenner of New York University (NYU), and Marti G. Subrahmanyam of
NYU’s Stern School of Business finds is that our existing laws suck
at preventing insiders from cashing in, at least on certain kinds
of deals. In fact, the SEC isn’t even very good at
preventing its own employees from engaging in trades based on
special knowledge—they actually require such trades in some cases.
And while enforcing insider trading laws isn’t the only thing the
SEC does, it’s a significant chunk of the agency’s $1.3 billion
budget. 

I’ll be on CNBC to talk about the new study today in the 1:00
p.m. hour. Tune in!