Sloppy Reporting at The Economist

In a piece on the Galleon hedge fund insider trading case, The Economist's lead begins:

MILTON FRIEDMAN argued for legalising insider trading on the grounds that it benefited all investors by quickly disseminating new information. These days such leave-it-to-the-market views are unfashionable.

In those two short sentences, there are three serious errors. First, As I explain in my book Securities Law: Insider Trading (Turning Point Series), it was Henry Manne who pioneered the information-related argument for legalizing insider trading. Friedman came along much later. So while it's true that Friedman eventually "argued for legalising insider trading," priority should go to Manne.

Second, the argument is not that insider trading promoted market efficiency "quickly disseminat[es] new information." As I explain in my book, the argument is that "insider trading acts as a replacement for public disclosure of the information, preserving market gains of correct pricing while permitting the corporation to retain the benefits of nondisclosure." In other words, insider trading does not disseminate information. Instead, it's impact on the market makes prices more efficient by causing the market to impound the value of information that nevertheless remains nonpublic. (The argument is wrong, but that's beside the point.)

Third, the point is not to "leave it to the market." The argument is not that the market can regulate insider trading. (Although some have made that argument on other grounds.) The argument is that insider trading makes markets more efficient.

Pretty sloppy.