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26 Conn. L. Rev. 1 (1993-1994)
Insider Trading as a Transactional Cost: A Market Micostructure Justification and Optimization of Insider Trading Regulation

handle is hein.journals/conlr26 and id is 19 raw text is: CONNECTICUT LAW REVIEW VOLUME 26 FALL 1993 NUMBER 1 INSIDER TRADING AS A TRANSACTIONAL COST: A MARKET MICROSTRUCTURE JUSTIFICATION AND OPTIMIZATION OF INSIDER TRADING REGULATION Nicholas L. Georgakopoulos ABSTRACT: This Article offers a direct justification for the regulation of insider trading from an economic perspective using the recently devel- oped financial methodology of market microstructure. Insider trading should be understood as a category of informed trading. Informed trad- ing is, generally, desirable because it promotes efficient pricing. Howev- er, lack of competition with other informed traders may allow small groups of informed traders to extract more profits than a competitive group of informed traders without influencing prices as much. The * Associate Professor of Law, University of Connecticut School of Law; SJ.D.. 1992, Har- yard University; L.L.M., 1988. Harvard University. I am deeply indebted to Professor Riier Kraakman for his invaluable advice, teaching, and support. This Article draws from the second chapter of the author's doctoral dissertation. A General Theory of Securities Regulation: An Economic Analysis of Securities Fraud, Insider Trading and Corporate Disclosure (1991) (unpub- lished doctoral dissertation, Harvard Law School). The comments of Howell Jackson, Louis Kaplow, Lucian Bebchuck, Christine Jolls, and William Klein (from the law and economics per- spective); the comments of George Constantinides, Ken Froot, Kathleen Hagerty, Bob Merton. Andrd Perold, .Paul Pfleiderer, Lisa Muelbroek, and Eric Sirri (from the perspective of finance); and the comments of the participants in the faculty seminars of George Mlaon and University of Connecticut Law Schools and the SJ.D. Colloquium at Harvard Law School are gratefully acknowledged.