Henry Manne says yes:
The implications of what we already know of this “wisdom of crowds”
approach to price formation, as against the traditional marginal
pricing/arbitrage approach, are apt to be startling. We should rethink
any current policies based on a view of pricing in which we exclude the
best-informed traders and discard the wisdom of the many. For instance,
we now have a new and more powerful argument than we had in the past
for legalizing most insider or informed trading.
Since such trading clearly makes the market process work more
efficiently, it aids capital allocation decisions and informs business
executives through market-price feedback of the best predictions about
the value of new plans. Furthermore, the Supreme Court’s “fraud on the
market” theory of civil liability under the federal securities laws and
Congress’s ideas of correct civil damage claims for insider trading no
longer have any intellectual merit. The same is true of any other part
of our securities laws implicitly based on the notion of the marginal
trader as a rational arbitrageur of price.
The new approach would suggest that it is undesirable to have laws
discouraging stock trading by anyone who has any knowledge relevant to
the valuation of a security.
Here is one summary; here is the (gated) WSJ piece. I find it hard to believe that legalized insider trading would boost the level of equity prices in the United States; I would be willing to bet against that view. Some new developments would be reflected in stock prices more quickly but, given that most marginal investment decisions are financed by a) retained earnings, and b) debt, I doubt if this would improve resource allocation very much. Also keep in mind that another function of equity markets is to share risk and help people save for their retirement. Even if it is only an issue of perception, legalized insider trading won’t serve either of those ends.
For the pointer, I am grateful to Chris F. Masse.