Reducing the Profitability of Corporate Insider Trading With Pretrading Disclosure

Abstract

Over the last six decades, the federal government has constructed an extensive system of civil and criminal laws designed to reduce the ability of corporate insiders to make profits trading on inside information. During the 1980s, the government sought to increase the system's effectiveness by increasing penalties and devoting more resources to enforcement. However, both the volume of trading by corporate insiders and the profits these insiders make from corporate insider trading have increased dramatically since these measures were put into effect. In fact, I calculate that corporate insiders make almost $5 billion per year in insider trading profits. After surveying the evidence that corporate insiders trade on inside information, this Article explains why insiders are able to engage in such trading. The Article then puts forward a simple method for reducing insiders' ability to make profits trading on inside information: requiring insiders to disclose publicly their intended trades shortly before submitting orders to their brokers. The Article shows that this pretrading disclosure rule could substantially reduce aggregate corporate insider trading profits. The Article also explains how adopting a pretrading disclosure rule would enable the government to eliminate some of the existing restrictions on insiders' trading and thereby reduce the overall regulatory burden on insiders.