Insider Trading Regulation and Market Quality Tradeoffs

39 Pages Posted: 12 Aug 2020 Last revised: 25 May 2021

See all articles by Antonio Mele

Antonio Mele

University of Lugano; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Francesco Sangiorgi

Frankfurt School of Finance & Management

Multiple version iconThere are 2 versions of this paper

Date Written: July 13, 2020

Abstract

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

Mele, Antonio and Sangiorgi, Francesco, Insider Trading Regulation and Market Quality Tradeoffs (July 13, 2020). Swiss Finance Institute Research Paper No. 20-118, Available at SSRN: https://ssrn.com/abstract=3649928 or http://dx.doi.org/10.2139/ssrn.3649928

Antonio Mele

University of Lugano ( email )

Via Buffi 13
Lugano, 6900
Switzerland

HOME PAGE: http://antoniomele.org

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Francesco Sangiorgi (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 34
Frankfurt am Main, 60322
Germany

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