Insider trading laws
Craig Turner, 20241003
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This Carto Institute piece argues against Insider Trading laws,
https://www.cato.org/blog/should-insider-trading-be-legal

I have worked on equities platforms in the US and Europe, and write to defend
the current developed-economy practice of banning insider trading.

I consider both arguments listed early in the piece to be valid,

1. "insider trading argue [..] violates the principle of equal opportunity
because actors are trading on information available only to them". This is
true - it does undermine the principle of equal opportunity. The argument the
author makes later about hedge funds is not relevant to this, because they are
building their conclusions from a foundation of public information.

2. "[insider trading] creates inefficiencies by discouraging investment". It
does. The equities market only exists because of the combination of the heavy
regulation that creates it, and the public that chooses to invest in it. The
equities market will only retain public confidence while people have high
confidence in the utility value of the system. This is an ongoing project,
akin to regularly painting a house to protect the walls. Allowing insider
trading would undermine that project, because it would rightfully strengthen
the perception that there was one standard for insiders and another for
outsiders.

I will present two further arguments.

3. Work related to employment should focus on service to the company. If
people are trading on the back of information they access through employment,
that creates mixed incentives.

4. Laws around equities trading are structured to service the principle of
do-the-right-thing. This includes bans on front-running, rules about not
loading up the book to communicate false interest. The ban on insider trading
fits naturally into the ethos of the larger set of rules. It would be weird to
create an exception for that alone.

The post does present some interesting notes offering a picture of the world
without insider trading bans,

a. More efficient price-discovery. This is true.

b. Non-government mechanisms where firms prevent insider trading. A firm could
build a reputation for being good at this, and distinguish themselves against
the market.

The second point is true, but it creates a more complicated market structure,
because pricing of equities would need to consider how individual companies
enforce the behaviour of their staff.

Perhaps this would evolve into an industry standard akin to SOC 2 Type 2.
Yuck! It is simpler and more efficient to have the regulator outlaw insider
trading.

Most markets emerge organically. Food stalls, shoe shops, commodities, foreign
exchange. But this is not true of the equities market.

The equities market as we currently think of it is a product of heavy
government regulation, and would not exist without it. There is no such thing
as a big equities market without heavy regulation. If a country tried to build
such a thing, it would not win public confidence. If they changed an existing
system, liquidity would flow away to other jurisdictions. The importance of
public confidence motivated Hong Kong and France [1] to create insider trading
bans.

The dynamics of insider trading and public confidence are a reason to be
dubious about the prospects of some proposals for blockchain-based securities.

:1 See p46/47 of https://repository.law.miami.edu/cgi/viewcontent.cgi?article=1503&context=umialr