Brian Galle poses an age-old question, Why is insider trading illegal? At the risk of annoying my dear friend and mentor Henry Manne, I'm afraid I still think it's because we want to enforce private rights in information. I offer that argument, along with a critique of both arguments in favor of regulating insider trading and arguments in favor of deregulating it, in Insider Trading: An Overview, which is vailable at SSRN: http://ssrn.com/abstract=132529:
Insider trading is one of the most controversial aspects of securities regulation, even among the law and economics community. One set of scholars favors deregulation of insider trading, allowing corporations to set their own insider trading policies by contract. Another set of law and economics scholars, in contrast, contends that the property right to inside information should be assigned to the corporation and not subject to contractual reassignment. Deregulatory arguments are typically premised on the claims that insider trading promotes market efficiency or that assigning the property right to inside information to managers is an efficient compensation scheme. Public choice analysis is also a staple of the deregulatory literature, arguing that the insider trading prohibition benefits market professionals and managers rather than investors. The argument in favor of regulating insider trading traditionally was based on fairness issues, which predictably have had little traction in the law and economics community. Instead, the economic argument in favor of mandatory insider trading prohibitions has typically rested on some variant of the economics of property rights in information. A comprehensive bibliography is included.
There's a shorter justification of the property rights approach in a 2010 post The Whys and Wherefores of Regulating Insider Trading.
You'll also want to read my post Implications of a property rights approach to insider trading.
As for whether the insider trading prohibition should be mandatory or a default rule, I addressed that issue in a 2009 post Why the insider trading prohibition is mandatory rather than just a default rule.
And, of course, you'll want my book Bainbridge's Insider Trading Law and Policy