You Have to Pay the Right Person

We talk a lot around here about insider trading. One thing that I often say is that insider trading is not about fairness, it is about theft. Whenever an insider trading case is announced, the prosecutors will make a little speech about how financial markets have to be a level playing field, and how the insider traders are cheaters who got the answers before they took the test, but it is all nonsense. Financial markets are not a level playing field; some people will always have faster computers or better resources or more money to spend on research than others, and they should have incentives to find out information that other people don’t have. But more important, the level-playing-field stuff is just not the law. The law doesn’t say that any time you trade on material nonpublic information it’s illegal. The law, to oversimplify a complicated area, makes it illegal to trade on material nonpublic information that you obtained in violation of a duty to someone: It’s illegal for corporate executives to trade on corporate information for their private gain, or to give that information to their buddies in exchange for a personal benefit, or for outsiders to obtain information in confidence and then betray that confidence by trading on it. The real issue is never1 whether the trading was unfair to the people on the other side; it’s whether the information was misappropriated from its rightful owners.

People continually find this odd, but it is not really an oddity of insider trading law. It’s pretty normal. The deep point here is that the law is pretty good at protecting property interests, but not so good at protecting fairness. If there’s a thing, and someone owns it, and you take it, the law can deal with that: It’s relatively straightforward to figure out what happened and explain why it was wrong and identify the victim and assign blame to the perpetrator and so forth. Fairness is a much harder concept to pin down and enforce; my “unfair advantage” might be your “deserved reward for hard work and innate skill.” What’s odd is not that insider trading law is about theft; what’s odd is that it almost looks like it might be about fairness, and that people think it is.