Insider Trading Examine the Strengths

Insider Trading

Examine the strengths and weaknesses of the two arguments against insider trading - property rights and fairness

Insider trading is one of the more controversial regulations affecting the buying and selling of stocks. Investors are legally bound not to act on inside information that can significantly affect the price of a stock until that information becomes public knowledge. Critics of laws against insider trading would argue that it is impossible to create a perfectly level playing field in terms of the buying and selling of stocks. The stock is the property of the individual holding the shares, and the individual should be able to dispense with his or her assets as he or she sees fit. Furthermore, the reason that people hire brokers is because they possess specialized information and expertise. To regulate the use of expertise and the use of high-quality financial information seems absurd.

However, the recent scandals at Enron and WorldCom exhibit the degree to which inside information can have a seismic effect on the profits of an investor. An inside investor who knew how either company "really" functioned would have known not to invest in the company, or when to have sold all of his or her shares. Ordinary people without such insider information lost huge amounts of money, sometimes even their entire retirement savings. And the ability to know when to sell shares made the executives careless in their management, as they would know when they could "cut their losses."

Critics of insider trading laws would contend that the problem with Enron and WorldCom was insufficient oversight of these corporation's accounting procedures, not insider trading. The criminal behavior was not the fact that key executives knew when to buy and sell their shares, but their manipulation of company profits. Even many sophisticated investors were duped. And finally, the credit crisis of 2007 shows how no human being can perfectly predict market behavior, and is often duped by misleading indicators. Inside information is no guarantee of financial largess.