TribLIVE

| Opinion/The Review


 
Larger text Larger text Smaller text Smaller text | Order Photo Reprints

'Insider trading' canards

Daily Photo Galleries

By John Stossel
Saturday, Dec. 1, 2012, 9:01 p.m.
 

Insider trading leads the news again, casting a cloud over Steven Cohen's SAC Capital Advisors' $14 billion hedge fund.

The Securities and Exchange Commission charged Mathew Martoma, who used to manage an SAC Capital division, with using inside information about tests on an Alzheimer's drug to trade stock of the company working on it.

The media love this stuff. I imagine reporters sitting around saying: “The SEC finally will punish greedy Wall Street!” But this is nonsense. Government prosecutors are as ruthless and greedy as anyone.

It's easy to hate the rich — and in our bailout economy, there are reasons for suspicion. But capital doesn't find the best outlets by itself. Hedge funds spot promising opportunities and quickly direct capital that way.

When government interferes with that, we all suffer.

Under current law, insider trading still happens. Stock prices routinely rise before takeovers. The line between research and felony is very fine.

What's legal? Even the lawyers can't agree. The SEC says it is illegal to trade “securities after learning of significant, confidential corporate developments.” But people in a stock trade never have the same information. One does exhaustive research about a company, another does less, and a third trades based on some market theory. In no way are these three “equal” in what they know.

Yes, you say, but the prosecutors allege inside information. One trader may be an employee of the firm. Why should he be free to use that information to buy or sell a stock?

Because America should be a free country.

Investors say the law persuades more people to invest. “It makes markets more robust. That gave us biotech, Wal-Mart, Microsoft,” says hedge fund manager David Berman. “Companies raise capital in U.S. markets because of that confidence.”

If a stock exchange or company wants to have a rule against insider trading, fine. Some of us will invest only in those companies or that exchange. But imprisoning select people who catch a prosecutor's attention stifles the flow of information.

In an actual free market, a company's stock prices embody traders' expectations about its future. Information confirms or upsets expectations, and that is reflected in prices. The sooner relevant information gets built into the stock price, the better for everyone.

As economist Warren C. Gibson writes: “When the dissemination of significant news about a company is blocked by insider-trading restrictions, that company's shares are mispriced relative to where the price would be if the news were out. If the news is bad, investors will buy at prices they would not have paid had they heard the news. Movement of capital toward more productive uses is inhibited. If it is good, some sellers will let go of their shares at prices they would not have accepted. ... In either case, there is a net loss to the economy.”

Vague anti-insider trading laws distort prices. Also, these laws, like all regulation, create a false sense of security. They lead people to think stock traders play on the same level field. Far better to encourage investors to be wary — not complacent — when they buy stocks.

If you object to insider trading, avoid companies that permit it.

But government should butt out.

John Stossel is host of “Stossel” on the Fox Business Network. He's the author of “No They Can't: Why Government Fails, but Individuals Succeed.”

 

 
 


Show commenting policy

Most-Read Stories

  1. 71-year-old among 2 charged in several Pittsburgh area burglaries
  2. Four issues that the Steelers need to take care of in September
  3. New Kensington residents vent anger at council meeting
  4. Pittsburgh Mayor Peduto says new police chief’s skills fit the job well
  5. Lambo no longer in limbo with Pirates
  6. Pitt well-stocked along offensive line
  7. New Allegheny Valley Joint Sewage Authority manager welcomes challenge
  8. State police probe trooper’s arrest at Pittsburgh wedding
  9. Wainwright, Cardinals rough up Locke in 6-4 victory over Pirates
  10. Principals question role of test scores in new evaluation process
  11. Pair share love of dance with youths in Fayette, Westmoreland
Subscribe today! Click here for our subscription offers.