According to Financial Times News, federal prosecutors in Boston charged eight men on Tuesday for insider trading activities spanning almost a decade. The same week, two House Republicans pressured Speaker Mike Johnson to advance congressional stock ownership legislation that would further restrict trading. Research shows insider trading enforcement is remarkably ineffective – a study by Vinay Patel and Tālis Putniņš estimates at least four times as much insider trading occurs in the US as gets prosecuted. UK regulators found abnormal price activity before 30-40% of takeovers, yet there have been only a few dozen convictions over the past twenty years. The US lacks even a statutory definition of inside information, relying instead on case-law about “breach of duty.”
Enforcement failures
Here’s the thing about insider trading laws – they’re basically unenforceable at scale. The numbers don’t lie. When UK regulators admit that 30-40% of takeovers show suspicious trading patterns but only result in “a few dozen convictions” over two decades, what’s really being accomplished? It’s like having a 35 mph speed limit that everyone ignores because there’s only one traffic cop for the entire interstate system. The market cleanliness statistics tell a pretty damning story about how effective these regulations really are.
Inconsistent rules
And the rules themselves are completely arbitrary. You can legally use satellite imagery to analyze mining operations in Australia or track private jets to guess merger activity. But heaven forbid you find a crumpled board memo in the trash – that’s illegal! Where’s the logic? The author makes a great point about his thousands of meetings with management teams as a fund manager. Everyone knows why those meetings happen – it’s to get information edges. But somehow that’s legitimate while other forms of information gathering aren’t?
Academic perspective
Economists have been making the case for decades that insider trading might actually be good for markets. Milton Friedman argued you want MORE insider trading, not less. The reasoning? When insiders trade on material information, prices move toward their true value faster. That means regular investors get more accurate pricing and capital gets allocated more efficiently. Think about it – if 200 pharma employees know a drug failed, their combined selling pressure would quickly reflect that reality in the stock price. Instead, we get these artificial plateaus until the official announcement drops.
Transparency solution
So what’s the alternative? The author suggests complete transparency – either real-time corporate reporting (which isn’t happening anytime soon) or mandatory disclosure of all trades. Make job titles public. Let clever analytics track patterns. If everyone could see that a treasurer bought 100,000 shares right before earnings, that “edge” would get arbitraged away instantly. Blockchain technology could make this trivial to implement. Basically, we’re trying to solve a 20th century problem with 20th century tools when we have 21st century technology available. The current system protects nobody while creating the illusion of fairness.
