European Insider Trading Theory Revisited: The Limits of the Parity-of-Information Theory and the Application of the Property Rights in Information Theory to Activist Investment Strategies

Parity-of-information is purported to be the single overarching policy rationale for the European Union (EU) regulation on insider trading. This is because securities trading on the basis of informational advantages is generally prohibited under EU rules, as is tipping (and issuers’ selective disclosure) of material, non-public information. Yet, EU regulations allow market actors, including investment professionals and analysts, that have discovered valuable information -and thereby, have an informational advantage vis-à-vis their trading counterparties- to trade on this information. Relatedly, issuers of financial instruments, takeover bidders and merging parties can share information with a selected group of investors prior to public announcement of the transaction (market sounding), whereas firms can delay public disclosure of inside information and prevent all other market participants from trading on this information. I argue that these exceptions from the parity-of-information theory are -from a doctrinal standpoint- best explained as property rights in information of market actors that have developed new proprietary information with respect to European listed securities. This article, therefore, aims at providing a property rights account of the exceptions to the parity-of-information theory and it illustrates the trade-offs between the parity-of-information and the property rights in information theories underlying European insider trading rules. By extension, I analyze the specific case of activist campaigns as inside information and argue that it would be consistent with the property rights approach to allow activist investors to share their investment and trading strategies with other market participants that further their activist agenda.