The government has made it a priority to root out insider trading, pursuing prominent hedge funds and securing dozens of convictions in recent years. And yet, a more comprehensive solution to end the illegal practice is elusive.
One way to approach the problem might be to change how companies disclose important information. If material information were reported more frequently, the potential rewards of insider trading might diminish, James Surowiecki writes in his column in The New Yorker.
“Because investors are kept in the dark, the value of inside information is artificially inflated,” Mr. Surowiecki writes.
“More consistent, if not real-time, data about revenue, new orders and major investments would help investors make more informed decisions and, into the bargain, would diminish the value of insider information,” he continues. “If companies tell us more, insider trading will be worth less.”
As Mr. Surowiecki notes, the current system dates to 2000, with the arrival of Regulation Fair Disclosure. Under that rule, known as Reg FD, the Securities and Exchange Commission requires a company to publish material information to all investors at the same time.
But in a counterpoint, such a proposal would be “completely wrongheaded,” Paul Murphy argues in The Financial Times’s Alphaville blog.
In a sense, rules governing disclosure may have made insider trading more tempting, Mr. Murphy writes, in a challenge to Mr. Surowiecki’s proposal.
“In the past, the spoils from confidential information were broadly spread across a wide range of market participants. Now it’s the preserve of the chosen, well-placed few,” Mr. Murphy writes. “The inconvenient truth here is that regulation aimed at curbing insiders actually enriches the true criminals.”
“Faster, ever more regular management updates won’t change that one jot,” he says.