Insider Trading Regulation and Market Quality Tradeoffs
39 Pages Posted: 12 Aug 2020 Last revised: 25 May 2021
Date Written: July 13, 2020
Insider trading should not be left unregulated: it should be either subject to mandatory disclosure or banned altogether. As the costs to collect and process information drop, investors render markets increasingly efficient. Insider trading would hinder this process by discouraging such activities: prohibiting it would avoid information crowding-out and make markets more efficient. When information costs are large, or uncertainty is small, such that information activities are limited to start with, these effects are small and regulating insider trading through mandatory disclosure leads to the informationally most efficient market. In times of elevated uncertainty, post-trade regulation of insider trading also acts as policy complement to ex ante corporate disclosure for the purpose of increasing market efficiency. Finally, markets are always the most liquid with a complete ban on insider trading.
Keywords: Insider trading; post-trade transparency; ex ante corporate disclosure; information crowding-out.
JEL Classification: D82, G14, G18
Suggested Citation: Suggested Citation