> I feel like this begs the question of information inequality, though. If all traders were equally informed, then mispricing would be avoided as well. And without the complexity of trying to infer information from the trades of others.
If all traders were equally informed (perhaps by a law that any information you wanted to trade on had to be public), there would be no way for people to profit by digging up new information. We (society) like it that analysts have a financial incentive to figure out the truth about how well a company is doing - whether that be by coming up with a better model of how one industry affects another (which will ultimately lead to better allocation of resources), or doing the legwork to realise that a particular company is a massive fraud (which leads in a more direct/obvious way to better allocation of resources).
But we don't want them to just bribe insiders - that causes agent-principal problems, gives certain market participants unfair advantages, and all the rest of it. Hence the law, where figuring out these things through research is encouraged, but getting them from insiders is illegal.
If all traders were equally informed (perhaps by a law that any information you wanted to trade on had to be public), there would be no way for people to profit by digging up new information. We (society) like it that analysts have a financial incentive to figure out the truth about how well a company is doing - whether that be by coming up with a better model of how one industry affects another (which will ultimately lead to better allocation of resources), or doing the legwork to realise that a particular company is a massive fraud (which leads in a more direct/obvious way to better allocation of resources).
But we don't want them to just bribe insiders - that causes agent-principal problems, gives certain market participants unfair advantages, and all the rest of it. Hence the law, where figuring out these things through research is encouraged, but getting them from insiders is illegal.