[iwwr]

There is information other than insiders get which can be used as an advantage. A person more knowledgeable about a field of activity may be better at spotting trends in that field. Also, someone like Warren Buffet who actually steps foot on the ground may get overall better information about companies.

But more profoundly, the markets are not really suited for retail customers. These people are drawn in by the promise (often lie) that investing is easy and it is possible to make a hobby out of it. What happens is these amateurs are losing money, which are gained by the real professionals.

Rules against insider trading are directed at making the markets a fairer place and especially so for the retail customers. In reality, these rules create the illusion that it's possible to make it as an amateur with little money and no connections. As we've seen, the promise is often illusory.

[netcan]

I wonder what the markets would look like if insider trading ceased being thought of as a crime. You just expected to make your decisions knowing that others out there may have better/different information.

Would this completely destabilize markets or would it find some new stability as people got used to it.

[mdda]

The 'first order' effect of insider trading is that some well-informed people can make profits at the expense of those who know less : But the flip-side is that price-discovery happens quicker.

The more insidious effect is that liquidity goes down (transaction costs are higher for everyone), since one always has to be wary that the person selling to you knows more than you do.

From an economics point of view, regulating (or not regulating) insider trading are both valid options. But the liquidity argument is the swing vote.

[netcan]

I don't find that transaction costs / liquidity story very convincing. Buying from someone who knows something is no more damaging than buying from someone who doesn't if its the same stock at the same time.

[mdda]

Suppose someone is selling you a house. They're desperate to sell : are you saying it makes no difference whether they're selling because their aunt just died (i.e. random sale) or they're someone within the town planning department?

Or suppose it's a car mechanic that wants to unload a car cheaply?