Insider Trading Is a Contentious

Insider trading is a contentious issue both in the stock markets and with the public as a whole. The public views the issue as a criminal one. They want fairness, and feel that protection against insider trading will help avoid outcomes like the 1929 stock market crash. To an extent, the effectiveness of our capital markets depends up investor confidence. The 57 million households who rely on the capital markets for the retirement funds, their pension funds, or their children's college funds need efficient markets that do not put them at a disadvantage.

Yet for insiders and free market advocates like Dr. Manne, the issue is far less cut-and-dried. Part of the problem is the very definition of insider trading. The SEC has allowed its judgments and the legal system to define insider trading over the course of time. The result is that still today the point at which information is "insider" is not easily definable. The ethics of insider trading are even less easily definable. Some activities - your classic "pump and dump" are more fraud than insider trading - and at that point have clearly crossed an ethical line. Other actions, such as that which resulted in Martha Stewart's conviction, tread a thinner ethical line.

Dr. Manne's free market contention of course provides no comfort for individual investors. Indeed, it runs directly against the efficient market hypothesis, because perfect information isn't granted to the broad market by market-moving insider transactions, but rather by information releases that are generally preceded by trading halts, or announcements made after hours. Despite the logical fallacy, the argument is yet made that insider trading serves a valuable function in our stock markets.

Further complicating the issue is that the definition of insider trading differs from one jurisdiction to the next. Given the increasing globalization of business, it seems unreasonable that we can continue to exist in a world with a poorly-defined and highly variable definition of insider trading.

The everyday investor, certainly, cannot invest with any confidence under the present circumstance. Efficient market theory demands that information be perfect, but it is difficult to guarantee that given the vast number of stocks trading on our stock exchanges today.

Whatever the solution, it should be tailored with specific objectives in mind. These objectives should take into consideration what stock markets should be. The original intent was to provide a means for companies to raise capital, and that is still a critical function today. However, they are also the places where people, everyday citizens, have their life savings stored. That makes stock markets a critical component in the nation's economy.