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.

Alexander 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.