Insider Trading in a Mannean Marketplace

Abstract

In 1966, Henry Manne contended that insider trading should be legalized. He argued that permitting insiders to profit from trading on material, nonpublic information would result in faster incorporation of information into securities’ prices and, as a result, expedite the movement of capital to its most efficient uses. The government has rejected Manne’s argument, choosing instead to make the prosecution of insider trading violations a high priority. This Article posits that the government has, in fact, accepted Manne’s position in cases where insider trading occurs in an organized market for material, nonpublic information. The Securities and Exchange Commission has acquiesced in arrangements in which insiders sell material, nonpublic information, disclosed by the seller in violation of a fiduciary duty, to subscribers before it is publicly available. In one such market, as exposed by the New York Attorney General, news wires sold advance access to material, nonpublic corporate announcements to high-speed traders. This Article presents new evidence that nationally recognized statistical rating organizations may have created a similar market for material, nonpublic ratings-related announcements. The Securities and Exchange Commission’s policy may reflect the recognition that an elite group of traders will be the first to receive and trade on this information regardless of whether it is obtained in violation of insider trading law. The fact that material, nonpublic information is routinely traded on in violation of insider trading laws calls for a reversal in academics’ research agenda. For decades, academics have accepted the appearance of insider trading enforcement as reality. They should, instead, give the thriving Mannean marketplace its due and focus on defining its structure, scope, and effects.

Keywords: insider trading, manne, 10b-5, news wires, ratings, mannean, securities law, securities regulation, SEC, commission, chiarella, O'Hagan, TSC, Cady, Dirks, newman, high frequency trading, HFT high-frequency trading, algorithms, nonpublic, non-public, microseconds, milliseconds, advance access

JEL Classification: K00, K2, K22, L1