Insider Trading Should Be Legal? Debunked

by Darwin on November 27, 2012

In what may be one of the dumbest articles to grace the front page of CNBC’s website, a so-called author Carol Roth advocates for the legalization of insider trading.  This piece of excrement was published here, but within, you’ll find a point by point rebuttal of this screed.  Here’s a sneak peak “what I am saying is that it is time to do away with the laws against insider trading entirely.”  Ms. Carol makes the following points which are followed by my common sense and fact-based rebuttals to each point:


I do want to clarify that my argument focuses on the legality of trading on insider information. It should be noted that I do also believe that those with access to information should ethically and morally respect confidentiality agreements and fiduciary duties with the companies where they are accessing the information, but that is a separate civil, not a criminal, matter.


  • OK, so she clarifies that this should be solely a civil matter, not criminal.  That doesn’t lessen the stupidity of this argument in any way.  Should Bernie Madoff not be behind bars, but only have been sued for recovery of the funds he embezzled?   This is moronic.  I mean, where is the deterrent?  It would be insider trading gone wild.  If every executive, CFO and low-level admin or analyst with access to insider information prior to publication knew that the worst penalty they’d face is to simply return some or all of the ill-gotten gains they just cheated from the retail investing public, we’d see insider trading activity skyrocket.  Sharing a cell with a large man named Bubba is much more of a deterrent.  It works.  While insider trading cases in the US make big headlines, if you think about the sheer number of major mergers and acquisitions, earnings beats and misses, material events that companies release to the public and more, it is truly remarkable how little we see insider trading, volatility prior to public announcements and options activity and the like.

Here’s where she touts how Insider Trading actually benefits us all.  Oh thank you, may I have another!? WTF. Read on:


Information makes the market more efficient: Information is the driver of market efficiency. While a perfectly efficient market will never be achieved, getting information to the market as quickly as possible helps to lessen the gaps of asymmetry and allow that information to reach a maximum of participants as quickly as possible. It smoothes out volatility, lessens the exposure to bad information and increases the exposure to good information, each of which benefits all market participants. Incentives, such as profits to be made from information, helps expedite that flow of information. Further, by eliminating insider trading as illegal, it will actually lessen the amount of profit to be made from seeking out the information by increasing the number of participants willing to do so.


  • PUBLIC information, as it is known at any given time is the driver of market efficiency.  Non-public info is meant to stay that way until ALL market participants have equal access to digest and trade on such info.  You dope.  And “lessens out exposure to bad information and increases the exposure to good information”?  What the hell is she even talking about?  Is This Real Life?  That’s what she’s smoking.  Let me get this straight.  Some corporate officer knows they’re about to acquire a competitor.  They go an buy a shitload of out of the money stock options just below the offer price.  They make the announcement.  Said officer pockets a 10,000% return on their money overnight.  (I’m not being facetious  properly picking the right out of the money call with a short-dated contract can deliver that kind of leverage).
There’s a gray area between proprietary research and insider information: While the case of Dr. Gelman tipping off Mr. Martoma that the Alzheimer drug performed a certain way in a clinical trial may be a clear cut example of insider trading, many times the line is blurred between information and research. For example, if I sent interns out to every Cheesecake Factory daily to talk to the managers, count traffic and interview customers in the parking lot and these interns reported back to me that sales were up at restaurants from month-to-month based on this activity, that’s technically non-public information that was derived from research, and trading on that research is legal. However, if I had dinner with the CEO and he told me that sales were up from month-to-month before he put out a press release, that would still be non-public information but it would be illegal to trade on it. It’s the same information, so should the methodology of retrieving it make a difference? No, the market doesn’t care how the information was obtained, it only cares that sales are up. 
  • Is she serious?  She doesn’t see the friggin difference?  The example at Cheesecake factory is a horrible example, because any member of the PUBLIC could do that.  This is easily accessible to any member of the public – especially since they are not talking to officers of the company, but a routine employee on the floor.  A member of the public CANNOT however get advance notice of clinical trial results before they are announced.  It is as clear as night and day.
Someone always has an advantage — in everything. Some argue that insider information creates an unfair disadvantage for the “little guy”, the individual investor. I can’t think of anything in life where something doesn’t create an advantage or a disadvantage for someone. Fair only exists in fairy tales. The markets are inherently unbalanced. There are participants that have faster computers. There are participants with better algorithms and smarter staffs. There are those that transact a lot of business with certain investment banks who are going to get more favorable allocations in IPOs and follow-on offerings because they are better clients. So, someone is always going to have an edge somewhere.
  • More utter stupidity.  I cannot imagine the quality of the “book” this person conjured up, but with statements like this, it’s truly mind-boggling how or why she even has any access to CNBC let alone a shitty penny-stock blog.  She is a moron.  Someone always has an advantage?  Let me see, so it’s OK if throughout my child’s schooling, the rich prick’s kid across the street gets all the tests in advance from K-12 and thus has a much better shot at a higher GPA than everyone else?  That’s OK?  Oh, and how about the police can just pull over Ms. Roth any time they choose and harass her for doing 26 in a 25, not coming to a full stop, etc. while they turn a blind eye to everyone else?  Aww, life’s not fair?  These are ridiculous arguments.  This is a MERITOCRACY you dipshit!  Not an aristocracy where the corporate execs can continually game the system (Well, Congress gets away with it, and that is outrageous, but nobody disagrees with that, except Carol).  The playing field should be leveled where possible, where the government isn’t sticking their nose in something to actually put someone else at a disadvantage while trying to be “fair”.
A Winner Doesn’t Mean a Loser: How do you have a crime when there is no victim? When I trade in the market, I don’t know who is on the other side of my trade as a buyer or a seller. Just because one side profits (or avoids losses) that does not have a direct impact on the counter-party, because my offer to sell or buy has no bearing on whether the counter party is interested in buying or selling. But my interest in taking or selling a large stake will eventually send a signal that is absorbed by the market and affect the price. 
  • This woman has no idea how stock markets work.  Of course, if ill-gotten gains are being achieved by a cheater by either shorting or buying a stock, the unsuspecting fool who took the other side of the trade would not have made that trade if they had the same information.
You Can’t Enforce Inaction: If someone receives insider information, you may be able to prove when they acted on a piece of information, but you can rarely prove when they don’t act. If I was planning to sell a stock, but received information that things were going really well and don’t sell because of it, that’s no different than buying for the same reason, except that you can prove the latter. The same thing for not buying something you were planning to buy but heard unfavorable information. I take issue with making something illegal when half of the outcomes are unenforceable. 
  • Dumb, dumb, dumb.  In these cases, nobody was hurt.  Who the heck knows if someone was “going” to do something and changed their minds – that is what, 0.1% of insider trading situations?  Inside traders go for the bonanza – the takeovers, the earnings beats/misses, the announcement that the CEO is about to resign due to “indiscretions”.  Those are the big problems.
Insider Information Doesn’t Guarantee Outcomes: While you may be able to predict the outcome that a failed drug trial will have related to a stock, many times even if you knew the information, you wouldn’t know how the market would react to it. A merger announcement may make a stock go up or down, depending on expectations. Even a positive sales announcement may not move a stock if that expectation was already priced in. We just don’t know, so trading on insider information gives you one side of information, but not the other critical piece- how will other participants react.
  • Oh, so that makes it OK?  I should be able to work with a casino dealer and fix the game so he keeps dealing me aces?  I mean, there’s no guarantee that if I start with one Ace every hand I’m going to keep getting blackjack, or even beating the dealer for that matter, but I’d sure as hell bet my house on 20 hands like that!  It’s a fix!  That’s what this is.  How can she argue that a fix is OK because it’s not “guaranteed”?  WTF’inF?
I could go on with a take-down of her personal blog and “brand” which is horrifically cheesy and craftily embellished, but whatever.  She’s should be ashamed of this piece plain and simple.
If this type of crap annoys you, you should see the rest of my Criticism Section.
What Are Your Thoughts on Insider Trading?

{ 4 comments… read them below or add one }

Kevin@Invest It Wisely November 27, 2012 at 8:52 am

I think the libertarian viewpoint is also that it should not be illegal on the basis of those with more access to info or ability to shape the system, such as elected officials, can already benefit through means not available to the general populace, and that if it was not illegal then prices would be more efficient. I don’t know though. We only have experience through the system we have and we get enough abuses as it is that I don’t think the general public would accept that sort of a change.


Darwin November 27, 2012 at 10:27 pm

I like the libertarian principles, but sometimes they take it too far – like doing away with laws meant to combat racism, some regulation (like preventing insider trading), etc. They’re just as polarized as the two main parties unfortunately – but I do tend to lean libertarian more than anything I suppose.


krantcents November 27, 2012 at 4:38 pm

Your article reminds me of how Congress can trade on not just inside information, but on the laws that will be enacted. Our legislators are the ultimate insiders and they just recently changed the laws that affect their actions. How do they justify their actions?


Darwin November 27, 2012 at 10:29 pm

What a joke that whole debacle was. These Congressmen can beat the market by 12% per year? My ass. Totally insider trading over the industries they regulate. The thing is, they have no shame. Once a junior congressman tried to pass the “Stop Insider Trading Act” nobody would sponsor it for him. 60 minutes did a real nice expose on it. And then we Americans elected most of those called out again for another term. Who’s to blame?


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