The news that the feds are charging Mark Cuban with “insider trading” raises an interesting issue: what’s wrong with insider trading? You might think it’s obvious. If so, read the articles on insider trading in the 1st and 2nd editions of The Concise Encyclopedia of Economics. Some highlights from each.
From the 1st edition, an article by David D. Haddock of Northwestern University:
Even if insider trading sometimes creates more harm than good, rules against it could be contractual (e.g., “employees of our company who trade on material, nonpublic information forfeit their pension rights”) rather than mandated by government. Because the circumstances facing companies differ, insider trading might be advantageous for some companies and not for others. And if so, would it not be sensible to permit firms to “opt out” of insider trading enforcement? Interestingly, Texas Gulf insider Charles Fogarty [who had engaged in insider trading of his company’s stock] was subsequently elevated to chief executive officer of his company. Moreover, following Fogarty’s death, another insider, who was also known to have traded on the same information, was elevated to replace him. Clearly, Texas Gulf’s board of directors and shareholders must not have found the trading completely reprehensible. Yet the law makes no provision for opting out, implicitly assuming that insider trading injures all companies. Policymakers never seriously ask who is harmed, who is helped (other than the insiders), and by how much.
And Haddock’s closing paragraph:
Far from the clearly settled moral issue that naïve media pieces, movies, and novels would have it be, both the theory and the evidence of insider trading remain primitive and equivocal. Present rhetoric–and law–have far outrun present understanding.
From the 2nd edition, an article by Stanislav Dolgopolov of the University of Michigan Law School, in which Dolgopolov addresses the “cui bono” question:
Who benefits from regulation of insider trading? One group of beneficiaries is market professionals–broker-dealers, securities analysts, floor traders, arbitrageurs, and institutional investors. The reason is that they are “next in line” for trading profits, as they possess an advantage over public investors in collecting and analyzing information (Haddock and Macey 1987). Regulation also, of course, benefits the regulators–that is, the SEC–by giving that agency greater power, prestige, and budget (Bainbridge 2002). However, the benefits from insider trading laws to small shareholders, the alleged primary beneficiaries, have been extensively debated.
Note the “power” part of the above quote. When government officials use their discretionary power to prosecute some people and not others, are they using their power to go after people who have displeased them on other grounds? Could it be, for example, Cuban’s willingness to follow the bailout closely and critically? HT to Karen DeCoster on this latter angle.