[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?