Law & Business | Professor Bainbridge

Insider Trading Frequency

There was a rather breathless report last week on the frequency with which insider trading occurs:

Insider trading of public companies that are bought through mergers or acquisitions occurs very frequently according to a study conducted by Measuredmarkets for the New York Times.

The researchers conducted the study by analyzing historical trading behavior. Surprisingly, 41 percent of all stocks that were bought with a market value greater than $1 billion showed suspicious trading activity just before buyout bids were made public. In these cases huge spikes in trading volume in the stocks and options on the stocks were identified. For example, in the days before bidders announced offers for Amegy Bancorp trading volume in the stock soared by 400 percent. The study�s findings indicate that insider trading is much more prevalent than ever thought.

More prevalent than who thought? In my insider trading scholarship, I've frequently noted that insider trading is rampant, is detected and prosecuted in a tiny fraction of cases, and probably is the most commonly committed violation of the securities laws. In any event, the report prompted my friend Henry Manne (the leading contrarian scholar of insider trading) to send along this email, which he kindly authorized me to reproduce here:

Posted on Monday, September 18 2006 | Permalink

I think the benefits of insider trading primarily come from trading on negative information. By trading, insiders disclose bad news that otherwise would have been kept secret. For positive information, insider trading does not have the same benefits because good news will be disclosed fairly quickly, with or without insider trading. I propose a regulation that prohibits insider trading on positive information and allows insider trading on negative information (with one exception). In fact, this regulation is already reflected in the Supreme Court case law (e.g. Dirks). For a more thorough analysis, I refer to my working that is posted on SSRN (http://ssrn.com/abstract=883642) and forthcoming: 37 U. Mem. L. Rev. (2006).

Posted by Kristoffel R. Grechenig on 09/19 at 05:02 AM

This is why I tell small investors to avoid buying individual stocks, they don’t have a chance in this pool of self-serving sharks.

Posted by on 09/19 at 06:06 AM

Dear Professor Bainbridge,

I tried to respond to your editorial request to Pajamas Media today via the email attached, but it bounced. Could you please respond with a another way to reach you via the contact slot on my blog (lower right). In short - we would be delighted.

Best regards,

Roger Simon

Posted by Roger on 09/20 at 09:59 AM

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