Wall Street’s thin white line
The ink on SAC’s indictment is barely dry, but Dylan Matthews argues that the entire case should be dropped. In fact, he writes, insider trading should be legalized. Laws against insider trading are “justified as providing an even playing field for small investors” despite the fact that a “playing field doesn’t exist”.
Bethany McLean looks at the history of the market-as-level-playing-field notion and concludes it “isn’t level, it never has been, and I’m not sure it can ever be”. Attempts to achieve fairness have all sorts of perverse effects, she writes, from the deteriorating quality of stock research, to financial folly by individual investors. “Nobody”, Matt Levine says, “goes around saying ‘let the little guy compete with trained neurosurgeons in neurosurgery’”.
John Carney, who has been, in his own tongue-in-cheek description, “an insane idiot on insider trading” for years, notes that the argument for legalizing insider trading isn’t new: it was first proposed in 1966 by academic Henry Manne. (The WSJ has a good summary of his arguments, or if you’re looking for something lighter, an animated bear.)
Matt Yglesias takes an opposite tack: insider trading should remain illegal, in part, because legalizing it would mean a huge diversion of management resources away from running companies and toward personally profiting from their inside information. Regulators should minimize that “diversion of effort” by making insider trading illegal, Yglesias argues, and those laws “ought to be a model for looking at further curbs on speculative activity”.
Justin Fox, meanwhile, wonders why authorities aren’t focusing on more important financial misdeeds:
Five years after a financial crisis that, as best anybody can tell, had almost nothing to do with insider trading by hedge funds, the two biggest post-crisis criminal crackdowns on the financial sector in the U.S. have centered on… insider trading by hedge funds.
Our laws, Fox writes, are a vestige of a time when the stock market was the “biggest financial show in town”. That’s no longer the case, which may be a good thing. Matthews, McLean, Levine, Carney, and Yglesias all agree that owning individual stocks is a perennially bad idea for individual investors. — Ben Walsh
On to today’s links:
JPMorgan’s market manipulation as a metaphor for how “financial innovation substitutes for real innovation” – Matt Levine
JPMorgan agrees to pay $410 million to settle energy market manipulation charges – Reuters