Now, unless I'm missing something, I'm fairly certain that Libertarians aren't PRO insider trading. That said, are they for or against rules prohibiting it? Or do they view it kinda like hostile takeovers, a kind of unavoidable evil of the system?
Many libertarians think insider trading should be allowed. One argument goes like this, information will allow people to make money, but if insider trading is prohibited, then the people making the money are just information hawks instead of insiders. Average people still aren't being protected by insider trading laws. For example Warren C. Gibson argues on an article with the Foundation for Economic Education:
What happens when insiders are not allowed to trade on an important piece of news? That news will get out eventually, and the first people to find out about it will be outsiders just beyond the gates. These will very likely be securities analysts, whose full-time job is to keep abreast of developments in public companies. So they, the firms they work for, and their clients would be the first to benefit from the news. The news will eventually reach most shareholders, but later than it would otherwise. Instead of early profits accruing to insiders, they will accrue to professionals, and this makes no difference to most shareholders, especially long-term shareholders.
Another concern is that defining terms critical to insider trading lawsuits is very subjective and vague. Libertarians are very skeptical of the ability of democratic government to do anything complex without succumbing to corrupt special interests. Gibson continues with this argument:
Vagueness and subjectivity make insider trading well-nigh impossible to police. Difficult as it is to decide whether a particular transaction violated the rules, it is impossible to police nontrading. What if an insider had planned to sell but, having heard inside good news, decides to hold instead? Insider gains from such inaction could be very real but impossible to detect or punish.
Cato institute (a libertarian think tank) scholar Doug Bandow make similar arguments, saying:
The objective of insider trading laws is counter-intuitive: prevent people from using and markets from adjusting to the most accurate and timely information. The rules target “non-public” information, a legal, not economic concept. As a result, we are supposed to make today’s trades based on yesterday’s information.
Unfortunately, keeping people ignorant is economic folly. We make more bad decisions, and markets take longer to adjust.
Gibson proposes that instead of using the state to prosecute insider trading, corporate bylaws should define what insider trading is and how it should be punished financially. If corporations defined and punished insider trading, then competition would lead to more effective ways of getting back money from fraudulent insiders especially compared to relying on a stagnant government bureaucracy.
Another libertarian approach to reform insider trading laws, here expressed in an article from the Foundation for Economic Education, is to let corporations opt out of insider trading protections.
[insider trading] can increase the general efficiency of financial markets. Instead of an outright prohibition, no trading on insider information could be the default policy for corporations, but they could opt out in favor of a policy allowing insider trading by making that policy clearly and widely known.
This idea comes from the framework of libertarian paternalism. The government should be there with basic guidelines, but companies should be free to make their own choices. This approach recognizes the downsides of allowing unlimited insider trading, but accepts that their might be upsides policymakers can't see and lets people choose for themselves where to put their money.
A theoretical objection to insider trading is the strong efficient market hypothesis(EMH). Weaker efficient market hypotheses say that people can't make money off of publicly available information. Many people believe this. The strong efficient market hypothesis states that individuals cannot beat the market even if using inside information. One example definition is:
The strong form of EMH assumes that current stock prices fully reflect all public and private information. It contends that market, non-market and inside information is all factored into security prices and that no one has monopolistic access to relevant information. It assumes a perfect market and concludes that excess returns are impossible to achieve consistently.
If you think markets are strongly efficient, then insider trading is not a problem. I don't think all libertarians believe that it's impossible to make money off of insider information, but their faith in markets means many libertarians find the strong EMH more compelling than the average voter.
Professor Bainbridge a leading conservative corporate law scholar who is a professor at a law school is a pretty strong opponent of insider trading on balance. He is a fairly informed critic of this having written a book on it.
Admittedly he is arguably more socially conservative in connection with his devout Roman Catholic religious beliefs than many people who would classify themselves a libertarian. But, the arguments that he advances for not regulating insider trading as a crime in the manner that we currently do would be essentially the same ones that a libertarian would make on the subject as "socially liberal" issues really have little to say about an almost purely economic issue like insider trading. For example, pretty much any view regarding insider trading can be consistent with Roman Catholic positions on the sanctity of life.
Probably the best way to sum up his views, with apologies to a much more nuanced position, is that inside information should be viewed a property of a corporation rather than something that it "breaks the rules" to disclose, so civil lawsuit enforcement by the owner of the information ought to be the limit of any regulation.