This post originally appeared in Money Stuff.
Insider trading, I like to say, is not about fairness; it’s about theft. People—even prosecutors bringing insider trading cases, who ought to know better—love to run around saying that insider trading is about making sure that the markets are a “level playing field” for all investors, but that is obviously wrong. Markets are not a level playing field and we shouldn’t want them to be. If you have information that nobody else has, you should trade on it, because the social purpose of the stock market is precisely to incorporate new information into stock prices. If you investigate a company and talk to a lot of sources and visit its factories and conclude that it is a fraud, then you should definitely short its stock; that’s what short selling is for. The problem is that you shouldn’t trade on secret information if—speaking loosely and imprecisely—it belongs to someone else and you are misappropriating it from them. If you are the CEO of a company—or its investment banker, or its CEO’s therapist, or whatever—and you know secrets about the company, those secrets really belong to the shareholders, and you are cheating them by trading. (This is, again, a loose and somewhat unorthodox statement of the law, and it is certainly not legal advice, but it’s way better than the “level playing field” thing.)