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Insider Trading Improves Investor Confidence

Holman Jenkins today joins the chorus calling the latest insider trading dragnet "insane."

Sandra Baker | Photographer's Choice | Getty Images

His original contribution to the debate comes in the form of a refutation of the traditional argument that insider trading hurts investor confidence. To the contrary, Jenkins argues, it should make investors more confident that they are buying at a fair price.

"What really improves the small investor's confidence in the market's fairness is when he buys a stock, is blindsided by some corporate announcement, and yet notices the stock barely moves anyway thanks to the sharpies who made sure the information was already in the price," Jenkins writes.

Let's say, for instance, you are considering buying shares of a computer manufacturer. Little do you know, the company has been having trouble selling its computers lately. Wall Street analysts have missed this trouble and are expecting a great quarter. You trust the analysts and buy a bunch of shares. When the news comes out about disappointing earnings, you get hit hard as the stock dives.

Now if someone had gotten word about the poor sales—say, the Asian supplier of motherboard's leaked that orders were lower than usual—and shorted the stock based on that information, the price you bought the stock at might have been lower. When the bad news becomes public, the stock falls less than it would have. In other words, the ordinary investor gains from a market in which stocks are priced according to better information—even inside information.

So why is the government trying to crack down on expert networks and consultants that discover this information?

Jenkins answer is: insanity.

"Insane is seeking serially to expand the circle of people who can be criminalized for trading on it, as if it were desirable to keep accurate information out of stock prices," he writes.

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