GMU prof makes the case for insider trading

On its surface, it seems logical for insider trading to banned. But George Mason University economics professor Donald Boudreaux made an intriguing case for insider trading in an opinion piece over the weekend in the Wall Street Journal.

You can read the entire piece by clicking here, but I'll summarize the main points.

First, though: Insider trading is defined as buying or selling stock based on information that is not, or not yet, available to the general public, usually gleaned through personal connections. So let's say you hear that the FDA is going to approve a company's new cancer drug. You buy a bunch of shares of that company before the news gets out. When it comes out, the stock price soars and you make a lot of money that people who did not know about the new drug's approval could not.

Boudreaux, however, argues that insider trading actually sets a stock's real, fair price much more quickly because it will be moved by people inside the company who actually know what is going on.

This helps the outside investor, who now is able to buy and sell a company's stock based on its truer price.

Enforcement, however, and bias are the real problems with trying to police insider trading, Boudreaux and others argue.

Let's say Ted heard about that new cancer drug based on inside information and bought 1,000 shares of the company's stock. If he's caught, he can go to jail.

But let's say Mary already owned 1,000 shares of the cancer company's stock that she was thinking about selling. She, too, heard the inside information about the FDA approval, and now she does not sell her stock. She benefits just as much as Ted, but because her activity is undetectable, there's no way to prosecute her.

-- Frank Ahrens
Sign up to get The Ticker on Twitter