Insiders Are Good at Trading

“The basic problem,” I once wrote, “is that, if you are a senior executive at a public company, you always know stuff about your company that the public doesn’t know, but you might want to sell stock sometimes.” This is a real and hard problem. If you are the chief executive officer of a public company, every single minute of every day you know more about that company than the average retail investor does. If the standard was “you can never sell stock if you know anything the public doesn’t know,” you could never sell stock.

Maybe that’s fine! Maybe the rule should be “nobody who works for a public company can buy or sell stock in that company until they leave the company.” But that does seem like a harsh rule. Companies like to pay senior executives in stock, to align incentives, and they like the executives to hold that stock for a long time, but they also want the executives to be able to buy houses and pay for their kids’ college tuition and if all goes well buy yachts. If the rule was “stock can never be sold,” companies would have to pay their executives with more cash and less stock, and executives who had liquidity problems would have to quit to be able to sell their stocks.