15.
Heroic Insider Trading
Insider
trading--making profits in financial markets from knowledge not available to
the general public--has been a universally scorned activity of late. But what is the nature of this alleged
crime? Making financial gain on
superior knowledge is exactly what the stock market is all about.
In fact, this is what
all business activity is about.
Doesn't Delta make a success of its airline business because it knows
better than others how to run an airline?
Doesn't Coca-Cola make a success of its soft drink business because it
knows the ins and outs of production, distribution, marketing and consumer
demand better than other establishments?
Certainly, Delta and Coca-Cola don't reveal to competitors their insider's
knowledge of their businesses.
But beyond the
universal nature of insider trading what are its effects on the stock
market?
Let's say Investor A
has knowledge that Acme is about to be bought by Ajax and therefore buys
Investor B's stock at the current price of $20. The takeover occurs, and the price shoots up to $40. Investor B would have sold the stock
anyway, whether Investor A had his knowledge or not. But, somehow in inside-trader-hater logic, ignorant but
lucky Investor C, the one who would have made the purchase from Investor B if
Investor A had no superior knowledge to act on, could have legitimately been
the one to make the quick $20 profit.
But we must ask: Why is C's ignorance a legitimate means
of earning profits but A's
knowledge an illegitimate one?
This boils down to scorning the knowledgeable for being knowledgeable
and elevating the ignorant for being ignorant--hardly a desirable trait for
social well-being.
Besides, the very act
of making stock purchases on insider trading helps to reveal to the world,
through the higher stock prices, that these stocks are currently
undervalued. Thus, economic
information is actually spread through markets more quickly when insider
trading occurs than when it is effectively outlawed. And every economic theory I'm aware of says more information
sooner is better than less information later.
There's a rule of
thumb popular among investment advisors which says the amateur investor should
not buy individual stocks because individual stock investing is a full-time
job; likewise one should realize when undertaking stock investments that there
are bound to be people with more knowledge than he has about the prospects of
future stock values.
Insider trading is a
victimless crime, and its prohibition should be viewed as nothing more than a
welfare program for S.E.C. lawyers.
This becomes all the more obvious when it is realized that "insider
trading" is not even defined in the laws. It is in fact so vague that it could be used against
virtually any investor.
The one
legitimately-wrong kind of inside trading is where someone uses
"inside" knowledge in violation of a contract or explicit trust. In such cases, civil law ought to
apply, with damages to those wronged, rather than criminal law with fines to
the U.S. Treasury.
"OK," you
may be thinking "there really isn't anything so evil about insider
trading, and all of the recent legal activity is no better than a witch hunt,
but why call them heroes?"
Well as stated (in
regard to other alleged scoundrels) in Walter Block's, Defending the
Undefendable:
...others are generally allowed to go about
their business unmolested, and indeed earn respect and prestige, but not so
these scapegoats; for not only are their economic services unrecognized, but
they face the universal bile and wrath of virtually all, plus the additional
restrictions and prohibitions of governments. They are heroes indeed; made so by their unjust treatment at
the hands of society." Foreword
Further, since they
act on a legitimate, but unacknowledged right, they help secure the liberties
of all, while more timid souls shrink from the battle. Inside traders should be granted the
respect they truly do deserve.
-
Block, Walter
Defending the Undefendable,
(New York: Fleet Press, 1976)
foreword.
-
Fischel, Daniel
Payback: The Conspiracy to Destroy Michael Milken and his Financial Revolution,
(New York: HarperCollins Publishers, Inc., 1995)
pp. 40 - 68, 301.
-
Frantz, Douglas
Levine & Co., Wall Street's Insider Trading Scandal,
(New York: Henry Holt and Company, 1987)
pp. 54 - 55, 219 - 221.
-
Levine, Dennis B.
Inside Out, An Insider's Account of Wall Street,
(New York: G. P. Putnam's Sons, 1991)
pp. 124 - 125.
-
Rockwell, Llewellyn H.
"Michael R. Milken: Political Prisoner," in The Economics of Liberty edited by Llewellyn H. Rockwell,
(Auburn, Alabama: The Ludwig von Mises Institute, 1990)
pp. 70 - 72.
-
Taylor, John
Storming the Magic Kingdom,
(New York: Alfred A. Knopf, Inc: 1987)
pp. 243 - 248.
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