Insider Trading: Should It Be Abolished?

1654 WordsJul 31, 20107 Pages
Insider Trading: Should it be abolished? Insider trading is defined as “ trading whilst in possession of non-public information and if known to the public, may lead to a substantial movement in a security’s price” . In Australia it is prohibited by insider trading regulation (IT regulations) in the Corporations Law (CL) 1991 , though it was initially established from recommendations made by the Rae committee in 1974 on the mining company scandals . The latest law changed one single section to 20 wide and complex sections, causing critique of Australia IT regulations . Henry G Manne argued that IT regulations should be abolished supported by three basic economic arguments. This essay will examine the pro and contra of each argument and…show more content…
Since investors get more helpful information to predict market trend, the transaction cost here is lower. Transaction cost is the cost to take the risk if the companies, which they invest in, somehow default. Thus lower transaction cost is equivalent to lower risk, which can encourage more investor to trade. As trading in the market occurs significantly in one flow (either buy or sell) based on the information they got, the volatility, which represented by the bid-ask (difference between the buy and sell quotes at any one time), decreases. Consequently liquidity increases. Evidence from Real Study In practice, Dodd and Officer found evidence that no significant abnormal returns (return of a security over its average or expected return) occurred on the day take over rumour was published, although some abnormal returns typically occurred prior to the publicity of rumour. This prior abnormal return must be because of insider trading, as the unpublished information they possess allow them to predict the trend up to takeover bid, thus, at the date of take over published, market already reached equilibrium price. Contra from Cox and Georgakopoulos and Response from Wyatt However, there are some disagreements on Manne argument. First, Cox claims that insider trading cannot make the price movement towards equilibrium price purely by their own actions . Also

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