Comments on the Article "from Texas Gulf Sulphur to Chiarelli: A Tale of Two Duties

Comments on the article “From Texas Gulf Sulphur to Chiarelli: A Tale of Two Duties”

By analyzing the differences between the judgments of TGS and Chiarelli cases, the author describes the fast development of the Securities law’s attitude and way of regulating, or, in other word, prohibiting insider trading, which specifically includes the points on the scope of the insider trading prohibition and the public corporation’s affirmative duty to disclose. Based on the author’s assessment on the evolvement of the law, it is much better for the Securities law to impose a limited prohibition on insider trading, which, in my opinion, should become the direction the Securities law tends to develop.

It is a well-accepted phenomenon that insider trading is existing everywhere in these days’ stock transactions. However, although prohibiting it has become one of the top missions of the Securities law in every country, yet the amount of the insider trading does not decrease resulting from such prohibitions. However, to some extent, it is impossible to and should not prohibit insider trading in stock transactions and insider trading should not be wholly regarded as a fraud on the market. This statement could find hint from some scholars’ theories. According to Manove, insider trading could be promptly reflected by the price of the stocks, enabling it better indicates the public corporation’s true value, which to some extent, promotes the informational effiency of the stock price. Accordingly, based on Manne’s theory, the insider trading has a “smoothing” effect on the stock price because insider trading constitutes efficient compensation for entrepreneurial services rendered to the corporation.

In order to support this statement, there are still some points should be clarified:

1. It is realistically impossible to eliminate insider trading.

In practice, the disclosure of the information regarding the insider trading should follow a certain timetable. However, situations of public corporation are changing from time to time. Thus, it is impossible to require corporation to disclose the information based on the changes of the corporation or even the simple thoughts of the executives.    

2. Insider trading will not decrease the efficiency of the market but increase it. 

Admittedly, someone may indicates that insider trading will bring the imbalance of the information to the transactions, resulting adverse selection and moral risks, which will eventually decrease the effectiveness of the market. However, from another point of view, insider trading will enhance market’s ability to attracting funds, increasing the efficiency of the market. According to Fama, without insider trading, the information on the market that people accepted will keep a balance, and the market will become a Strong-form Efficiency market. Under it, the true value and information of corporations will be completely reflected by the stock price. Thus, there are only investors but no speculators in the market and accordingly, the market will become inactive. However, the uncertainty of the market is the main part that fascinate investors, losing it, will lose the investors eventually.