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Substitutes for Insider Trading
Ian Ayres, Yale Law School
Joseph Bankman, Stanford Law School
ABSTRACT:
When insider trading prohibitions limit the ability of insiders (or of a
corporation itself) to use material non-public information to trade a particular firm’s
stock, there may be incentive to use the information to trade instead on the stock of
that firm’s rivals, suppliers, customers, or the manufacturers of complementary
products. We refer to this form of trading as trading in stock substitutes. Stock
substitute trading by a firm is legal. In many circumstance, substitute trading by
employees is also legal. Trading in stock substitutes may be quite profitable, and
there is anecdotal evidence that employees often engage in such trading. Our analysis
suggests that substitute trading is less socially desirable than traditional insider
trading. We recommend a set of disclosure rules designed to clarify existing law and
provide information on the extent of stock substitute trading. We also discuss
possible changes in the law that might limit inefficient trading in stock substitutes.
SUGGESTED CITATION:
Ian Ayres and Joseph Bankman,
"Substitutes for Insider Trading"
(April 2, 2001).
Yale Law School.
Yale Law School John M. Olin Center for Studies in Law, Economics, and Public Policy Working Paper Series.
Paper 252.
http://lsr.nellco.org/yale/lepp/papers/252
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