George Mason economist Don Boudreaux makes the case for legalizing (decriminalizing) insider trading, a potentially victimless "crime," in the Wall Street Journal. Here's an except:
Not only do insider-trading prohibitions slow economic growth, promote corporate mismanagement and discourage investment diversification, their application also is unavoidably biased.
These prohibitions are meant to prevent all insiders with non-public information from profiting from the use of such information before it becomes public. It follows that unbiased application of these prohibitions should target not only traders whose inside information prompts them to actively buy or sell assets, but also traders whose inside information prompts them not to make asset purchases or sales that they would have made were it not for their inside information.
The insider who learns that the Food and Drug Administration will approve a new blockbuster drug developed by a major drug company, for example, obviously profits from this information if it prompts him to buy 1,000 shares of the company that he otherwise wouldn't have bought. So, too, though, does the insider profit who, upon learning the same information, abandons her plans to sell 1,000 shares of the company. But because insider "nontrading" is undetectable, only the former insider is practically subject to prosecution and punishment.
And because opportunities to profit through insider "non-trading" might well occur with the same frequency as opportunities to profit through insider trading, as many as half of those investment decisions influenced by inside information might be undetectable.
This bias is not only a source of prosecutorial unfairness; its existence casts doubt on the assumption that insider trading is so harmful that it must be treated as a criminal offense. After all, if capital markets continue to function as well as they do given that many investment decisions potentially influenced by inside information are unstoppable because they are undetectable, why believe that the detectable portion of investment decisions influenced by inside information would be harmful if they were legal?