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Is Insider Trading Harmful?

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Raj Rajaratnam [2] is arrested and charged with insider trading.

I have no idea if Mr. Rajaratnam really did what the government accuses him of having done.  But let’s assume that he really did trade on inside information.  Should he be prosecuted?

No.

I am firmly a “Henry Mannean” on this issue: insider trading is beneficial, not detrimental, to markets.  Insider trading promotes, rather than hampers, market efficiencies [3].  Those who trade on inside information — assuming that their doing so violates no fiduciary or contractual duty they have to the corporation — do no harm and ought not be punished.

Here’s an interview that Larry Elder did a few years ago with Henry Manne on insider trading [4].  (HT Justin Rohrlich [5])

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