Thursday, July 11, 2019
William & Mary's Kevin Haeberle has a new paper entitled Information Asymmetry and the Protection of Ordinary Investors. It takes a close look at the degree to which the core securities laws designed to reduce information asymmetry actually protect ordinary investors in the stock market. Haeberle explains how market makers adjust prices to manage the costs information asymmetry imposes on them. He focuses on how this response creates illiquidity in the market. But then he explains that while this illiquidity hurts many investors, it also helps others—namely, longer-term investors. Thus, reducing information asymmetry will affect different investors in different ways, turning on the time horizon of their investment.
His key takeaway is then that securities laws reducing information asymmetry impose a long-overlooked cost on at least buy-and-hold ordinary investors (including both those who trade directly and those who invest through mutual funds), while conferring only limited benefits to those investors. Accordingly, whatever it does for society, an excessive focus on stopping some investors from making "unfair" gains based on superior information may actually be a bad thing for ordinary investors.
Haeberle closes out the paper by pointing out that the SEC would likely be more effective in protecting ordinary investors from stock-market information asymmetry if it focused more on other areas of law—for example, by regulating the kinds of advice retail investors actually receive.