Even if you outlaw insider trading, some people still receive the information faster than others when it is released. Using the logic of the regulators, shouldn't that be unfair too?

Insider and outsider trading have no effect on long term stock valuations. The only thing they affect are the names on the stock certificates. People who have positioned themselves to know more than others should be allowed to invest in their knowledge. No one has a right to equal information just like they don't have a right to equal property or education.

Short of signing confidentially contracts, insider trading is a property right. Arguing for laws against this right would be similar to establishing “fair exchange bureaus” or a “just price” for goods and services, and are idiotic. People don't have a right to equal knowledge.

Theoretically speaking, it seems like a very obvious theoretical improvement to our current situation.

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Information asymmetry is best resolved, theoretically, of course, by marketplace negotiation and price discovery.

In theory, of course.

Usually when companies get approval, they release that information right away. I'm not sure exactly how the notification process works, but the company will only hold onto the information long enough to write a press release and for the trading day to be over. Of course, that doesn't always stop someone at the FDA trading on that information before it's even released to the public or a senator. The senator can trade with impunity since insider trading rules don't apply to politicians.

Also, companies generally frown upon insiders trading on material information. Many companies – particularly certain financial firms – have policies about trading any stock at all. Those rules are the creation of the company and employees who break them risk their jobs. In fact, when I worked for such a company, my husband absentmindedly bought shares in one of our accounts without first asking my firm for permission. I was hauled into the CEO's office and my job was spared only because it was pretty obvious I wasn't aware of the oversight and the stock had no connection to our firm whatsoever. I have no problem with company imposed insider rules – which I think work better anyway. I take issue with the SEC's rule.

Where I don't agree with you is that seeing what insiders are doing in the market or seeing how a company's stock reacts to what insiders are doing is better than knowing the actual reason, the news itself, that insiders are doing what they're doing.

Let me give you an example. Say the drug company has an experimental drug going through FDA approval. They get that approval at 5pm one evening, but instead of immediately accouncing this, they wait 24 hours and, during that period, buy as much company stock as possible. In response to all this buying, the company's stock rises, and alert investors might notice all the buy orders and the rising stock price and guess that FDA approval happened. But that's a GUESS and, while valuable, it's not as valuable as KNOWING what happened.

But, the most valuable information insiders bring to the market, IMO, is information that will NEVER be publicly announced until it's too late – fraud. Yes, it would be better if they announced the fraud to everyone, but that would sort of defeat the purpose of defrauding people in the first place and criminals don't like to shine spotlights on their activities.

Sorry, but economiser is not the one missing the point. If we had to eliminate everything that is “unfair” in the world, we'd have to nuke the planet.

Having access to the same information, levels the playing field and makes it a fair play.

Whether you're good at analyzing that information or whether you have time to analyze it, is irrelevant.

Insiders have access to information that nobody else has. That makes it unfair.

Some participants are really good at analyzing publicly available financial information and can come up with a better estimate of fair value than I can (e.g., Warren Buffett). Some participants have more time than I do to parse through publicly-available financial data (e.g., anyone employed full-time as an analyst). Some participants are better-trained and smarter than I am. All of their trades move the stock's price and are valuable information for me, just as my trades are valuable to other people.

Fair value calculations don't operate in a vacuum. If I do all the research I can and come up with a fair value of $5 for a stock, but it's historically always been trading at $50, that fact makes me cast doubt on my own analysis. Maybe I'm right in the end, or maybe I'm missing something big about that company. Either way a difference that big would give me pause.

I understand that “getting duped” weighs heavily on the person it happens to, but that event seems likely to happen anyway and more people are “duped” when valuable information is withheld from the market.

If no trader is allowed to trade based on new fundamental information, how can trading reveal anything about it?

Confidence in the market is very important, it is what allows people to participate in the market. Why would anyone bother playing a game they cant win? If the big gains are going to be had by those with inside knowledge, and ordinary people cannot attain inside knowledge, then they are going to lose out. Their potential for outperformance would be reduced significantly.

Another problem is that you assume that the information temporarily on the “inside” will be reflected accurately in the price once it is made public. More often it is not. The price is more likely to over shoot the real price.

Finally what makes you think that participants in the market want accurate prices when they invest?

True. However, what the large trade is telling you is that the fundamentals might have changed while you weren't looking. Fundamentals change as new information is revealed.

but those valuations are based on identical information – fair play.

Completely untrue. Information in the market is never identical and rarely do people have the same information at the same time. Information is discovered and one process of discovery is through the process of trading.

Fair value is based on fundamentals. It has nothing to do with trading price or how large order somebody submitted.

Yes, people can come up with different fair value (somebody is buying at $50 and somebody is selling at $50) but those valuations are based on identical information – fair play.

Not so with insiders using privileged information.