Question

There are regulations that prohibit "insider trading," which is the use of nonpublic information about a security to earn abnormal profits from trading that security. Which form of market efficiency would make these laws unnecessary? Explain why.

Answer 1

Strong form of Market efficiency which is advocating that all the publicly available information and privately available information have already been discounted into the stock price so there is no scope for any investor to make any excess rate of return than the index rate of return.

Strong form of market efficiency completely advocates that insider information and all the price sensitive management known informationswhich are part of privately known information have already been discounted into the stock price because market is highly efficient and there is no possibility for any investor to gain from those insider informations because they are already reflected into the stock price so this strong type of market efficiency will be completely eliminating the need for regulation that will prohibit the insider trading because the investor do not have any scope for making any additional rate of return by having access to those informations.