Balbinder Singh Gill stated that an insider trade that improves price accuracy today can reduce participation that makes the price informative tomorrow. The remark, blunt and counterintuitive, captures a tension at the heart of market regulation.
The Insider's Paradox
Most arguments against insider trading focus on fairness—the idea that someone with non-public information has an edge over ordinary investors. Gill's observation shifts the lens to efficiency. A single insider trade, he argues, can push a stock's price closer to its true value in the moment. That seems good. But the same trade may scare off other traders, who worry they're always swimming against a hidden current. Over time, fewer participants means less trading volume, fewer signals, and ultimately prices that are less informative.
It's a short-term gain for a long-term loss. Gill didn't specify any particular trade or company. His statement was general, almost theoretical. But it lands at a time when regulators debate how aggressively to pursue insider trading cases.
Short-Term Accuracy vs. Long-Term Health
The logic is straightforward. An insider acts on material, non-public information. The trade immediately moves the price. That movement reflects the insider's knowledge, so the price becomes more accurate—closer to what it would be if the information were public. For a day trader or an algorithm looking at tick data, that price is useful.
But the next day, other traders see the price move without understanding why. They suspect someone knew something they didn't. Trust erodes. Some pull back. Others demand a higher risk premium. Liquidity dries up. The market becomes less attractive to the very people whose trades would later make prices informative. Gill's paradox suggests a self-defeating cycle: the more insider trading succeeds in correcting prices, the less the market can sustain the participation needed to keep prices correct.
What This Means for Market Design
If Gill is right, the usual equation—more information is always better—needs a qualifier. Information that arrives through insider trading carries a hidden cost. It changes the behavior of everyone else. Regulators already consider deterrence, but the cost-benefit analysis rarely includes this dynamic. Market makers, exchanges, and enforcement agencies may need to weigh not just the unfairness of a single trade but the systemic effect on participation.
Gill didn't offer a solution. He didn't call for stricter rules or looser ones. He simply stated the trade-off. That leaves an open question: if insider trading can momentarily improve price accuracy, should that be weighed against the damage it does to the market's long-term ability to produce informative prices? No easy answer exists, but Gill's point guarantees the debate won't go away.
