The Importance of “The Law of Conservation of Securities”: A Reply to John P. Anderson’s “What’s the Harm in Issuer-Licensed Insider Trading?”

Professor John P. Anderson’s article, What’s the Harm in Issuer-Licensed Insider Trading?, argues that my “Law of Conservation of Securities” has no moral relevance to the question whether to allow such trading. The Law of Conservation of Securities demonstrates that each stock market insider trade has specific victims and is “advantage-taking.” Some “advantage-taking” stock transactions are moral; others are not. To determine whether stock market insider trading is immoral, applying a principle such as utilitarianism or Professor Anthony Kronman’s “paretianism” requires consideration of the harm stemming from the conduct. The Law of Conservation of Securities identifies the victims of each insider trade and enables analysis of the indirect consequences of that injury, such as wider bid-ask spreads by market makers and impaired investor confidence—both of which, in turn, increase firms’ cost of equity capital. Specifying the actual victims also helps to determine whether the market would know how much to adjust share prices for the possibility of insider trading and whether such adjustments (even if accurate) would compensate all investors for the risk of injury. With corporation-approved insider trading, the issue also arises whether the decisionmakers adequately consider the interests of non-shareholder victims