Insider Trading

Insider Trading

To most, insider trading exemplifies the seedy underbelly of everything that is wrong with the white-collar industry. According to Knowledge@Wharton, insider trading is defined as "benefiting from 'material, non-public information,'" with respect to markets. As it stands now, this practice is illegal and aggressively investigated, but rarely proven. However, many economists believe that insider trading should not only be legal, but would actually be economically efficient and beneficial.

According to the law and those who make the laws, insider trading provides unfair advantages to those who are privy to information that the general public (meaning small-scale/personal investors) is not. They argue that if given the opportunity to use inside information, the markets become unbalanced and large public corporations will be able to make large profits on false or misleading information, or they can act on opportunities, like mergers and acquisitions, before the news and benefit from the rising price of the company being bought. In fact, it is also illegal to practice insider non-trading based off of news not open to the general public. Non-trading is the practice of holding stocks that one would have otherwise sold. Although this is technically illegal; it is incredibly, if not impossible, to prove.

The other side of the argument contends that insider trading is a healthy way of keeping companies honest and allows for markets to adjust more quickly to large changes, instead of delaying prices because the company was not ready to share the news. But then the issue is raised, "How do we ensure that these early fluctuations are not detrimental to markets and/or the companies affected by insider trading? Without heavy, not to mention expensive, government regulation, companies and industries would be forced to regulate themselves. If a company releases information to its employees that could potentially drive down the price of their stock, they would simply prohibit their workers from acting on the news in the market. If an individual employee were to act on the news and leak it to the general public, he/she would be subject to termination. If the company made that individual sign a confidence contract, then that employee would also face a lawsuit. This alone would be incentive enough to not practice insider trading for most, especially if it caused harm to that employees company.

Another reason to legalize insider trading would be the speed with which markets would adjust to relevant news. Assume that a computer company found out that their new products had a fatal flaw and after six months of use the computer would explode. If the employees holding stock did not sign a contract stating no insider trading, and the government did not regulate it, then all of the employees privy to this information would sell off the stock as quickly as possible. The