Insider Trading

Abstract

Insider trading Mervyn King and Ailsa Roell Insider trading is more than a theft of information. It is not always clear who are the guilty insiders and who are the victims; and insider trading has benefits as well as costs. Benefits occur when information is more quickly disseminated in the markets, improving the choices of decision makers. Costs are the increase in bid-ask spreads – as market makers fear that they may be dealing with insiders – which acts as a tax on trading. Costs also occur because of the resources wasted by investing in activities of high private but low social value. It is not easy to decide when the costs exceed the benefits; one likely instance is inside information during take-over bids. Both British and US evidence presented in this article confirm that insiders achieve abnormal gains and, surprisingly, that these gains persist long after the disclosure of insider trading. Because all other traders are potential losers, there are many victims but no credible plaintiffs, hence the need for regulation. A comparison of the recent evolution of British and US regulation, in the aftermath of spectacular scandals, shows notable differences in the burden of proof and the legal definition of the offence.

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