Ever since the news broke this weekend of the huge insider trading investigation now being pursued by the DOJ and the SEC, articles have been flying in the press questioning whether insider trading should even be illegal (see "The Government's Insane War Against Insider Trading," "The SEC's Absurd War Against Insider Trading," "Insider Trading Should Be Legal," "Maybe Insider Trading Should Be Legal," and so on.

There are arguments for legalizing insider trading that revolve around promoting the free flow of information--I get that. There are also arguments against legalizing insider trading that equate insider trading with the theft of information and conclude that it should be punished for the same reasons that we punish other forms of theft of property--I get that, too (and tend to agree).

But put all that aside, for a moment, and join me in imagining a world where insider trading is completely legal. Here is how I see life in Legalized Insider Trading (LIT) World.

First, in LIT World, the most important players in the global economy become people with early access to inside information. That is because such access will allow those who have it to legally make as much money as they want through insider trading with virtually no risk. If you know that a stock is going to leap up in value tomorrow due to a merger, some quick purchases of out-of-the-money call options will allow you to profit enormously. Although executives at public companies involved in mergers and acquisitions will occasionally have access to information about an imminent deal, this type of one-off knowledge pales in comparison to the people who are repeat players in the M&A process, such as:

  • investment bankers

  • lawyers

  • auditors

  • financial printers


It is the investment bankers and the others listed above (as well as financial journalists who write market-moving articles) who will become the true Kings of LIT World. Indeed, one can become a King without becoming an actual investment banker, lawyer, or auditor. All you need to do to become a King in LIT World is work at one of those type of firms. In LIT World, even secretaries to M&A lawyers or bankers working on deals will be millionaires many times over, as will their families and every one of their friends. The only challenge for the Kings of Lit World will be whether and how to ration out the inside information to their circle of friends and families to best avoid spiking up the price of a soon-to-be acquired company too quickly.

In LIT World, positions at law firms and investment banks will not have any salary--you will get unlimited wealth by insider trading, so why bother? In fact, young people who want to maximize their financial position will not even bother going to law school--just get whatever level of education is needed to become a secretary to an M&A partner at a law firm, and you'll have all of the inside information necessary to be lighting cigars on the beach with $100 bills in no time.

Kings in LIT World will be approached daily by people seeking access to their information. In reality, they can probably ask any price they want for that information. You want a yacht? Sure. A million dollar house? No problem. Whatever a non-King has to pay can be recouped quickly and many times over through insider trading.

Perhaps some Kings will sell a monthly pass allowing access to their inside information on eBay--who knows, but LIT World seems like a very, very odd place to me.