SEC Official: Insider Trading Makes for Efficient Markets

The prize for candid technocrat of the week goes to Erik Sirri,

the director of the SEC’s division of market regulation, speaking

on Thursday at a conference hosted by Vanderbilt University’s Financial

Markets Research Center. The subject is insider trading in the credit default

swap (CDS) market – something which certainly exists,

but which happens to not be illegal, the way the US regulatory system is set

up. CDSs aren’t securities, you see, and so if you trade them you can’t be violating

securities laws.

In any case, Sirri came out and said what everybody in the markets knows but

nobody wants to admit: "In a world of important pricing efficiency,

you want insiders trading because the price will be more efficient. That is

as it should be."

Sirri then went on to explain that insider-trading laws should still exist,

for the purpose of investor protection. But he added that he thought it "very

important" that credit default swaps be traded – something which

won’t happen if the tradable contracts fall under insider-trading regulations

while the present bilateral contracts don’t.


Campbell points out that the problem lies with the ridiculously complex

way in which financial markets are regulated in the US:

Thanks to the fragmented nature of the US financial regulatory system, CDS

abuse could fall through the cracks.

Does fall through the cracks, more like. Whether that’s a bad thing

depends really on whether you’d rather have efficient markets or investor protections,

in a world where "investor protections" are rapidly becoming little

more than full-employment devices for tort lawyers.

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