Critical analysis of the arguments surrounding the morality of engaging in "insider trading" in securities markets: although it is illegal in most stock markets, could the practice ever be eradicated totally and would this be desirable?
- Critical assessment of the main arguments surrounding the morality of insider trading
- Can insider trading be eradicated totally? & Is it desirable?
As the securities markets were expanding rapidly in the second part of the 20th century, a widespread assumption maintaining that insider trading must be prohibited on moral grounds took root in the collective consciousness. These economic transactions are illegal in most stock markets and the legislative responses to insider trading have been strengthening over the last decades. Indeed insider trading which refers to the ?ability of key employees to profit from knowledge or information that has not yet become public? , is considered as being contrary to the rules of good and moral conduct in respect of business practices. Insider trading is unfair in the same way as a fixed horse race is unfair; it gives the market a bad image.
Nonetheless, the illegality of insider trading is one of the most controversial debates among economists and legal scholars, since some argue that these economic transactions are not harmful, but beneficial to the whole economy. Undeniably they make the markets more efficient and closer to the reality, so that it is sometimes claimed that the regulations prohibiting insider trading should be revoked. From a moral perspective, insider trading can be seen as being reasonable and sound, whenever it does not involve the breach of any insider's duties or the violation of other's rights. Morally speaking, is insider trading in the securities markets acceptable? Could this practice be eradicated totally? Is it desirable?
We will first assess critically, from a moral point of view, the main arguments that legitimize insider trading in the securities markets. They will be scrutinized in order to determine their validity, and help conclude on the morality of these economic transactions. Then, a short study on the impact of the current regulations implemented to eradicate this practice will be performed in order to measure their efficiency. Finally a certain degree of flexibility in the legislations concerning insider trading will be considered in order to determine whether it would be desirable to allow these transactions from an economic perspective. This will enable us to decide on the necessary balance between economic efficiency and morality.
[...] Indeed, it is generally accepted in these markets that a participant will make deals based on non- public information, and take advantage of business opportunities due to his privileged position over the others, provided he does not breach any of his duties. The insider acts with prudence and business acumen, which is why his conduct does not affect the wealth of outsiders, since is their own lack of knowledge which exposes them to the risk of loss or denies them an opportunity to make a profit?. [...]
[...] Critical assessment of the main arguments surrounding the morality of insider trading First of all, ?insider trading? has a different meaning in business ethics, which is far removed from it is common definition under most government regulations. Indeed this practice is prohibited by law in the securities markets because of the fraudulent conduct of the trader. Insider trading is not illegal per se. It is the misconduct of the insider that makes the economic transaction illegal. Basically, an insider does not behave rightly when he fails to exercise his fiduciary duty to share the information that he has got, with clients, employers or shareholders, especially when the non-public information has been stolen or has been obtained by criminal actions. [...]
[...] Even if small investors are sometimes hurt by such practices, - which is more and more contested by some researches since it appears that insider trading is not the reason for the changes in stock prices prior to public announcements, leaks and rumors seems to be often better explanations - the benefits of insider trading through the information given by the insider compensate for their potential losses. Therefore it can be claimed that ?preventing insider trading would likely rob investors of useful information?16. [...]