Blahg, blahg, blahg: Legalize insider trading? Explain it to the 90 million.

By: Ray Pellecchia

File Under: NYSE

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One more word on the Reg. NMS/guacamole post (that’s three comments on that one, a HybridTalk record!). This came in a couple of weeks ago and I posted it without comment; just couldn’t get to it. It’s a bit off topic, but to continue the earlier football analogy, you don’t have to have both feet inbounds to make it into this space.

Ray, to answer your question honestly, I have to say you've stumped me as well. The best summary available of the darn report [NMS} is right on the front page of it! It's even titled "Summary," if that weren't obvious enough. By the way, I would have a guacamole recipe ready for you right now, but I suppose you wouldn't want it anymore. The Steelers won, which I'm sure you already know.

However, I do have some more thoughts for you. Let's discuss insider trading. I'd like to discuss its history, why it's considered illegal by the government, where it stands today, your personal views on it, and finally my own views on insider training. Since I've already started the discussion, it's your turn to input. So please, go ahead. I hope we can get somewhere beneficial for all of us. – Asad Panjwani

Asad -- Your humble blogger leaves it to others to weigh in on the history and illegalization, as it were, of insider trading. Where it stands today seems pretty clear: against the federal securities laws and NYSE rules.

Correct me if I’m wrong, but I read between your lines that you have a different view. I note your .edu address from a leading academic institution, and I’ve read some academics argue that unfettered insider trading would make for more efficient markets, because stock prices would always reflect all information, not just publicly available information. Insiders would help keep prices from getting out of whack if only we’d let them trade, the argument goes. The public would benefit from buying and selling based on stock prices always informed by the unrestricted buying and selling decisions of insiders.

If that’s your POV, then as this space likes to say, beg to differ, respectfully. And if this is going to be an intellectual conversation, we’re one intellectual short. I’m more than a little biased on this, having been 18 years at an organization that spends no small amount of time and effort watching for, investigating and prosecuting all manner of market perfidy. I’ve always thought legalizing insider trading would set the market back, oh, 80 years or so, when it was an insider’s game and the public knew it and stayed out of it, except for those who couldn’t resist the get-rich-quick mirage.

Today, thankfully, the market is different. There are 90 million Americans who trust the market enough to put some of their money into individual stocks or mutual funds, and stock investments are a significant component of household wealth. Those individuals and the institutional funds built on their confidence are the fundamental strength of the U.S. market, which is the broadest, deepest and most liquid in the world. Take away the trust of those individuals and subtract their participation, and what have you got? A market where it’s tougher for companies to raise capital and for individuals to grow their wealth. Not the position I’d want to put the American economy in as markets around the world become more competitive.

You want to tell the 90 million it’s okay that insiders act on information before they share it with the public -- that this will make the market more efficient, that we’re actually better off if the playing field isn’t level? Good luck with that. The public would vote with their feet and walk away from the market, and America would be the poorer for it.

That being said, the solicitation for guacamole recipes is always open. After all, the couch and I have ahead of us the rest of the Olympics, the World Baseball Classic, the World Cup, 162 games of baseball regular season, the Yankees in the post-season...