Why Is Insider Trading Considered Wrong? Insider trading is defined as “the trading of a public company's stock or other securities (such as bonds or stock options) by individuals with access to nonpublic information about the company. The stock market is supposed to be “fair,” and having insider information gives an illegal edge to possible investors. Insiders include those such as officers or directors of a certain company. They can also include investors that own more than a 10% share in a company because those individuals usually get to sit on the board. These individuals have a fiduciary duty to the owners of the company’s stock, meaning that they put their interests before their own. Furthermore, in the United States, insider trading does not have to be committed by an aforementioned “insider.” It can be committed by any shareholder who buys based off of nonpublic knowledge. When one person buys a stock because of nonpublic information, there is also a seller of that same stock that may have not made that sell decision if they knew the same nonpublic information, and vice versa. In addition, future buyers of that particular stock are going to pay inflated prices compared to the investor with insider information because he had access to that information first. Transparency is a big part of keeping the markets balanced, which means that all investors have the same information available to them. For example, it would not be fair if one student had the test bank for a test while the rest of the students did not. This would ruin the curve and the balance of the class grades, just like having insider information ruins the balance of the markets. The markets are already lopsided because individual investors have to compete with large institutional investors. If insider trading was legal, the average citizen would not put any money in the markets because the institutional investors and high level management in companies would share confidential information. The point of the stock market is to get the average person invested and help build a greater country with better businesses, not to funnel all the wealth to the top of the proverbial food chain. Also, when the “average” investor takes money out of the market, the market suffers from lack of liquidity, which is detrimental to the health of an economy. If an investor does diligent research and analysis on a company, invests in them, and gets a higher return than someone who did not do enough research, the end result is acceptable. Harder work and more in depth analysis should provide a higher overall return. However, insider trading takes this to a different level because no matter how much research is done, the information obtained for a monetary advantage cannot be obtained. There is also the moral aspect of insider trading to think about. The cost/benefit scale of insider trading is definitely skewed towards the insiders. A few people at the top of the corporate ladder get to make profits at the expense of the social good. In order to maintain a credible securities market, there has to be a lot of moral and ethics cooperation from everyone involved in the market. The deception involved in insider trading also makes it morally wrong. Deception is defined as “the act of making someone believe something that is not true.” Leaders of publicly traded companies can do this in many ways, but remaining silent is the most deceptive. If a company leader for Exxon knew that it struck a bunch of oil, there should be a moral obligation to let everyone know as soon as possible. To allow the continuance of trading without filling in the public on this information is lying in and of itself.
One of the most famous insider trading scandals involved Raj Rajaratnam and a tip from an Intel employee not to buy Polycom stock, “till I get guidance; want to make sure guidance OK,” This was in Raj’s text message inbox, showing that even a short text message without much context can be thoroughly investigated and shown to be insider trading. Also, Danielle Chiesi, a former beauty queen and hedge fund manager shared information in a phone call with Rajaratnam that Akamai was planning to lower its guidance. In a later call, he thanked Chiese for the tip, because the short was covered for a profit of $2.4 million. He also received a tip to invest in Hilton because it was going private. Rajaratnam bought hundreds of thousands of shares and ended up booking a profit of over $4 million. There were also many other tips received to collect smaller amounts of money, but in the end, he received an eleven year sentence in prison. He specifically developed relationships with people that could give him insider information. As long as there are people like this trying to make the markets unfair, insider trading should be considered wrong.

What are some main arguments against legalizing insider trading? An argument that comes from the side of “virtue” ethics is that insider trading is not just. Insiders have an unquestionable advantage with their access to nonpublic information. According to this virtue, the best way to deal with each other is to be fair in all dealings, and that includes dealings in the stock market. With extra information not available to the general public, insiders are argued to be “thieves” of the market. One does not need to even take an ethics class to know that thievery is immoral and unjust. It is safe to assume that most of the people with inside information would be executives at large companies. It is their job to keep up with the overall health of the business and any future plans that may affect the stock price. Tipping off other investors and then taking a cut of the money is equivalent to giving a carbon copy of a test bank to someone and asking them to scratch your back in return. In general, that type of behavior is frowned upon and will be especially frowned upon in the court room.
Rule-based ethics are defined as ethics that “judge the morality of an action based on the action’s adherence to a rule or rules.” It also specifies that action is more important than the consequences. The rules for illegal insider trading, according to SEC.gov are “Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include tipping such information, securities trading by the person tipped, and securities trading by those who misappropriate such information.” Yes, there is legal insider trading, but when it comes to the rule based ethics, the argument against illegal insider trading is that the perpetrators are simply not following the rules. Going further, insider trading is done by people that initially know their actions are wrong before a trade is placed or information is shared. The law specifically states in detail that information of nonpublic nature should not be shared for financial gain. This goes against the rules based ethics view because action should be more important than the consequences. To explain, the “action” of following the SEC insider trading laws should be more important than the possible returns to be had. However, when there are million and sometimes billions of dollars on the lines, the outlook on rules can become skewed. With one big tip, a person may not have to work another day in their lives. This does not make the action right, it simply explains why there is so much of this type of activity going on, and simply having rules against it will never cure the problem.
Consequentialism is an ethical theory that states that, “consequences of one’s conduct are the ultimate basis for any judgement about the rightness or wrongness of that conduct.” In this ethical view, as contrasted to rule-based ethics, the consequences are thought of before that action. Additionally, this theory implies that only a good and moral act will produce a good and moral consequence. This is certainly not the case when applied to insider trading. The perpetrators know that the consequences of committing insider trading can lead to large fines and jail time which should negate them from doing it in the first place. There are currently very strict laws in place to combat insider trading, however some think that more stringent laws should be passed to negate this unfair act. According to this way of thinking, consequences are what possible lawbreakers think about first, so as long as insider trading is a problem, it should stay illegal and laws should get tougher.
What are some main arguments in favor of legalizing insider trading?
According to Doug Bandow of the CATO Institute, “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.” He continues the argument saying that the goal of insider trading, keeping the stock market balanced and fair, is fallacious. This is because deciding not to trade a security is equivalent to buying and selling. He describes this by saying a person is “entitled” to insider information as long as they do nothing, because it is almost impossible to prove that someone did not purchase a security based on non-public information. However, when this person is not purchasing the security, someone without the secret information may be, and this is why the markets will never be balanced, no matter how stringent the laws become.
There is also the argument of if illegal insider trading actually does help balance the market, or if it contributes to making it inefficient. For example, Bandow states that, “Preventing those who know more about a stock from acting on that information, you impede the natural tendency of markets to set a fair price.” This coincides with the consequentialist theory of ethics because the consequence of having laws against insider trading is negative to the balance of the market. To carry out this theory, a person would have to fight for the lifting of these sanctions so that everyone was free to use non-public information as they saw fit, which creates the ultimate free market.
Another argument is that information should be introduced to the market as a whole as fast as possible. When large amounts of shares of stock are bought or sold, this changes the stock price almost instantly. This follows the virtue ethics theory because if a person thinks that insider trading is the quickest and most efficient way to keep the public up to date on how a company is doing, they will take measures to try and get it legalized. Milton Friedman, a Nobel prize winning economist said that “You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that.” Basically, the volume of buying and selling of a particular stock is information in and of itself according to this way of thinking.
Finally, an argument related to the consequentialist or rules based view of ethics is that there are other trading markets where one party having non-public information is legal, such as the real estate industry. For example, if I got tipped from a friend that his company was planning to buy a plot of land in 10 years to build a mall, I could buy that land without telling the land owner, and then resell it 10 years later at a huge profit. This is exactly the same deal that happens in the stock market, just with land as the asset instead of a security. Why should one be legal while the other is not? A person following the rules based view of ethics would not see this as fair because only one type of trading market has to follow strict insider trading guidelines.
Do you think Insider trading should be legalized? Why or why not?
In my opinion, insider trading should stay illegal. There are a few advantages to having it legalized such as the almost automatic translation of nonpublic information into a company’s stock price, but this comes with a lot of negatives as well. The negatives clearly outweigh the positives as a whole. My view of a perfect market is one where no one is afraid or feels cheated when they invest. Yes, large investment firms put a lot more money into the market than a middle class citizen, but those citizens help keep liquidity high. Also, by investing in American companies, citizens have more pride and want this country to continue being great and to grow. If Insider trading was legalized, I would not feel comfortable putting money into the market knowing that I was almost certainly at a disadvantage when compared with the big investment firms. I think that the biggest appeal of the stock market is that everyone has a fair shot to find good investments and make a solid return. Without this “fairness” the attraction of investing is severely damaged. It’s fair to assume that some of my bias against legalizing insider trading comes from how I was raised. I was raised in a home where “fair” was always a #1 priority. My brother and sister always got the same treatment as I did, and this was true with money and gifts as well. At the time I may have complained about it, but I’m glad that I still have those values to this day. Basically, my opinion is formulated on the fact that if something is illegal, no matter how stupid I think the law is, I should obey the law. Disobeying the law goes against my personal moral code, and I feel like that should go for anyone.
There have been plenty of chances for the courts to legalize insider trading if enough reason was found. Since I am not an expert in law, I am going to trust that the experts have come up with more negatives than positives in the courtroom when involving insider trading cases. I am a firm believer that the court system will determine the laws a lot better than I could.
The idea of “The rich get richer,” is alive and well in our culture today. While I do feel like getting a good education and working hard and making money isn’t a bad thing, using it to make connections with executives of companies for the illegal use of information is. Yes, it is technically possible for anyone to get a hold of insider information, but in reality, only the very rich get the useful insider information. This is because information of that nature almost always comes from executives of a certain company and is then passed along to other sophisticated individuals. The thing that does not make sense to me is why those in already lucrative jobs will put so much at risk to try and make more money. I have always heard that the more money you make, the more money you want, but I guess it never really clicked until I wrote this paper. Millionaires put their lives as well as their families’ lives at stake to make money illegally every day. The sad truth is that no amount of possible punishment will keep a handful of people from breaking the law. As long as there is an easy buck to be made in the stock market, insider information will be wanted by many.
In conclusion, I am going to reference gun laws. No matter how much more stringent gun laws become, there will always be a handful of crazy people that will still get their hands on illegal weapons and are at risk of killing innocent people. Similarly, no matter how much harsher insider trading laws become, there will always be a handful of people trying to squeeze by and make a quick and illegal buck. However, this does not mean I want all gun laws or all insider trading laws to be lifted and the actions to be made legal. If every kid in high schools around the country could carry guns to class, many more bad things would happen than what are currently happening. In comparison, if insider trading was allowed it would be impossible to get a fair shot unless there was direct access to the information that only the very wealthy and distinguished white collar workers have access to. In my opinion, Insider trading should always be illegal so that the normal American can have an equal opportunity to make sound investments.

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