Insider Trading
In general, insider trading in the stock market occurs when there is buying and selling of shares as influenced by privileged information only made available to a select few. The US Securities and Exchange Commission (SEC) further defines its legality: “Illegal insider trading refers generally to buying or selling a security, in breach of fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security.” On the other hand, legal insider trading occurs when the trader buys and sells stocks of his own company and reports them directly to the SEC.
There are two common moral arguments against insider trading. First, the privileged information being used by the trader does not belong to him but to the corporation. Hence, it is stolen and any gain that arises from the use of this information should rightfully belong to the corporation and not the insider. Second, the advantage that the information gives to the trader is unfair. While it is true that two parties involved in any transaction usually do not possess equal knowledge because one may be more inclined to further research, insider information is principally different. The party withheld of the privileged information will never have access to the same no matter how much analysis and research he carries out. Ultimately, these two arguments result to the unfavorable functioning of the stock market. Insider trading shrinks the size of the stock market since the general participants will be more careful and hesitant when trading given that some traders have unfair advantage over privileged information. With fewer traders, the market becomes less liquid, less efficient, and unstable. These arguments summarize three social impacts: harm, deception, and unfairness.
Insider trading causes harm in the sense that it results to a failure to realize favorable social welfare. In a stock market, there will always be winners and losers based on the prices they give and take. Ceteris paribus, the party with the inside information will always have the bigger probability of pocketing gains from changes in prices. Challenging these insiders who possess privileged information only increases the chance that one loses from his investments. As mentioned, market participants will be more hesitant to trade. With such a circumstance, confidence in the securities market and investments will be compromised driving the cost of raising capital for companies at higher levels. Thus, insider trading is morally wrong given that it entails overall costs that outweigh the insider benefit.
Next, insider trading is morally wrong in that courts have often ruled that it is a kind of deception leading to securities fraud. The law clearly states that if corporate insiders buys and sells stocks on significant but non-public information that should have been disclosed, their silence may be a ground for conviction. In such a case, deception occurs when there is discrete but intentional act of dishonesty. In this case, the law requires insiders not to merely conceal the truth but to reveal them.
Finally, the impact of insider trading as to unfairness does not stem from the asymmetry of information among the parties alone. It is primarily with regard to access of that information. On grounds of justice, the unfair advantage constitutes not only fraud but also theft of information that is rightfully owned by the corporation and its shareholders.
Ultimately, insider trading is morally wrong since it can be the tool by which corporate insiders can manipulate stock prices and corporate gains at the expense of other stakeholders and foster a means for exploitation. As a matter of principle, our disagreement over exploitative labor practices should also hold true for exploitative insider trading.
References:
- Sayler, Larry. Ethical Analysis of Insider Trading, 2012.
- Strudler, Alan. Insider Trading: A Moral Problem, 2009.
