Insider Trading: Should It Be Abolished?
Insider Trading: Should it be abolished?
Insider trading is defined as “ trading whilst in possession of non-public information and if known to the public, may lead to a substantial movement in a security’s price” . In Australia it is prohibited by insider trading regulation (IT regulations) in the Corporations Law (CL) 1991 , though it was initially established from recommendations made by the Rae committee in 1974 on the mining company scandals . The latest law changed one single section to 20 wide and complex sections, causing critique of Australia IT regulations . Henry G Manne argued that IT regulations should be abolished supported by three basic economic arguments. This essay will examine the pro and contra of each argument and shows that IT regulations have spoiled the notion of fairness at the expense of efficiency, despite the objective of any securities markets regulation to promote both aspects .
1. Insider trading could compensate corporate entrepreneurs .
Pro and Contra
This argument is supported by Carlton and Fischel who argued that the IT regulations are the same with setting government regulation of terms and conditions of employment; similar to restrict salary bonuses, stock options, vacation leave, and the others which can motivate management for their entrepreneurial skills . However their assumptions ignore the difference between the volatile share price and a certain amount of normal compensation. As argued by Easterbrook, where there is a volatile share price, the management compensation argument reverts into a “lottery-ticket argument” . Because in the volatile share price, even informed traders will hardly predict the increase or decrease of share price in the future. The high fluctuation equalizes the possibility of losing their investment and getting profit, which as called ‘compensation’. From the two extremes, It can be concluded that compensation argument can be valid if the share price is relatively stable otherwise not
Insider trading is defined as “ trading whilst in possession of non-public information and if known to the public, may lead to a substantial movement in a security’s price” . In Australia it is prohibited by insider trading regulation (IT regulations) in the Corporations Law (CL) 1991 , though it was initially established from recommendations made by the Rae committee in 1974 on the mining company scandals . The latest law changed one single section to 20 wide and complex sections, causing critique of Australia IT regulations . Henry G Manne argued that IT regulations should be abolished supported by three basic economic arguments. This essay will examine the pro and contra of each argument and shows that IT regulations have spoiled the notion of fairness at the expense of efficiency, despite the objective of any securities markets regulation to promote both aspects .
1. Insider trading could compensate corporate entrepreneurs .
Pro and Contra
This argument is supported by Carlton and Fischel who argued that the IT regulations are the same with setting government regulation of terms and conditions of employment; similar to restrict salary bonuses, stock options, vacation leave, and the others which can motivate management for their entrepreneurial skills . However their assumptions ignore the difference between the volatile share price and a certain amount of normal compensation. As argued by Easterbrook, where there is a volatile share price, the management compensation argument reverts into a “lottery-ticket argument” . Because in the volatile share price, even informed traders will hardly predict the increase or decrease of share price in the future. The high fluctuation equalizes the possibility of losing their investment and getting profit, which as called ‘compensation’. From the two extremes, It can be concluded that compensation argument can be valid if the share price is relatively stable otherwise not