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Using Insider Data Is Perfectly Fine

June 15, 1986

Regarding James Flanigan's June 3 column ("SEC Attack on Insider Trading Deserves Kudos"), let's agree on one thing at least: There is no real confusion about the insider trading issue--the SEC wants to outlaw or restrict as much as possible any private profit from using private knowledge. It's OK to have private knowledge, but not to use it or communicate it to someone else.

Insider trading means using one's knowledge to personal advantage. That's the essence of living in a competitive, free society. And it is already severely limited by the existence of competitors and the law of supply and demand. If I attempt to bluff you as to possible mergers, or quietly buy up as much pre-merger stock as I can, I'll quickly run into the brick wall of market forces.

We're all trading in the same market, reading the same newspapers and watching the same ticker. We're especially attuned to transactions that, in today's environment, hint at possible windfalls. You see it every day, that a rumored takeover has been discounted almost to the penny by so-called insiders--except that the insiders include every trader on the floor.

The same applies to all attempts to corner the market in commodities: Just as soon as the monopolistic trader buys up a healthy chunk of something, he discovers that the price moves up beyond his reach. No matter how big the conspiracy, it just doesn't work. There are too many traders, too much competitive, non-conspiratorial capital and too many other commodities in price competition with the one you've attempted to corner.

If anything, the go-go frenzy of mergers and acquisitions that results in huge profits for speculators nowadays is the result of other, broad-based government controls, rather than the working of a free, unregulated exchange of confidential insider knowledge. Forced out of profitable opportunities (such as new ventures and capital-intensive industries) that in earlier times were the proper, and most attractive, activity open to the investment banking community, the trend toward "artificial" profit-making is the avenue of last resort for those who must intensively pioneer creative ways to make money.

Curious, isn't it, that no one has been accused of wrongdoing because he acted on rumor, lack of knowledge, or stupid notions--which is all the insiders will have left to work with if the SEC forbids men to act sensibly in pursuit of their own interest.

Insiders work hard to acquire and keep personal fortunes and fortunes entrusted to them for management. They do not work for the benefit of their competitors or the government or the gross national product. Without private profit, you have nothing (except a gigantic black market, as in the Soviet Union, where profit-seeking individuals use insider knowledge of a different sort: the knowledge of bureaucratic loopholes, stolen inventories and who to pay off in order to make the deal).

Sure, junk bonds are disgusting. Insider trading has become a national disgrace, chiefly because it generates junk profits and marries illogical business ventures on the expediency of their discounted union. But the core issue is not one of bureaucratic measures versus criminal prosecution on Wall Street. What's needed is a broad-based reform of the economy in favor of those who know what they are doing, and do it.

Government restrains men from action; the more restraint you have, the less men will do.

And by characterizing insider trading as "a necessary evil," or evil of any sort, you implicitly commend ignorance and slander profit-making based on knowledge. Making money is good , by any means other than force or fraud; and if that notion is disputed we've traveled a lot farther toward communism than I care to ponder.


West Hollywood

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