NCPA - National Center for Policy Analysis

Pitfalls Of Insider Trading Laws

April 19, 2000

When Congress originally passed legislation to outlaw "insider trading" in stocks, its aim was to prevent persons with intimate knowledge of a company's operations from profiting on that restricted knowledge through stock purchases or sales.

But some critics are now pointing out that this prohibition also has its downside.

  • The Internet has made information about companies more readily available, yet the law for information disclosure by public companies -- as well as those aspiring to go public -- prohibits the release of materially significant news unless it is published simultaneously to the world.
  • The gatekeepers of corporate information have become public relations specialists and lawyers, which has resulted in less information about companies becoming publicly available -- making markets more volatile and vulnerable to unexpected news.
  • Critics charge that by excluding the flow of entrepreneurial information from deep inside companies, the U.S. effectively blinds its stock markets.
  • Deprived of knowledge, investors become paranoid and jump at every movement in the shadows -- investing on the basis of "momentum," which is to say, ignorance.

Some financial experts argue that the current rules on the disclosure of material information are in clear violation of the First Amendment and should be rescinded.

More readily-available information will undercut charges that stock markets are casinos, and help investors fulfill their real role as intelligent selectors of where to place capital.

Source: George Gilder (Gilder Technology Report), "The Outsider Trading Scandal," Wall Street Journal, April 19, 2000.

 

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