Manne: That was one of the very first myths in this field since my book in 1966. The serious scholars don't make that argument at all any more, because it's very clear that that person is in the stock market, an anonymous market, to sell the shares and doesn't care who buys them. If there's information out there, it may be an insider has it. It doesn't make any difference. Once you make a decision to sell, you don't lose anything when there's an additional buyer in the market, because that person happens to have information. That's absurd.
Elder: Another argument you make is that it helps to move the price of a share to its "correct level." What do you mean?
Manne: It's very important in the world of finance that shares be accurately priced. There are many things that turn on that -- compensation does, the whole takeover field turns on it, people's investment decisions turn on it, so it's very important that we have actual reflection of what's going on. Well, how do you get that? The SEC says, well, we'll get reports that come out three or six months later, and that will inform the market of what's going on. That's baloney. The way the market works is that informed people do their trading, and every time they trade on good news, they drive the price up -- every time they trade on bad news, they drive the price down.
Elder: Let's talk about the recent state of corporate accounting scandals: Enron, Global Crossing, etc. What impact would insider trading have had on these kinds of scandals?
Manne: I don't think the scandals would ever have erupted if we had allowed insider trading . . . because there would be plenty of people in those companies who would know exactly what was going on, and who couldn't resist the temptation to get rich by trading on the information, and the stock market would have reflected those problems months and months earlier than they did under this cockamamie regulatory system we have.
In next week's article, Professor Manne further explains the merit of insider trading.