Insider Trading: Is This Practice Good or Bad?
Insider trading is a complex issue, with a wide range of opinions across different industries and countries. At its core, insider trading is an illegal activity where corporate insiders, such as directors, officers, or employees, use confidential information to buy or sell securities with the aim of making a financial gain.
Insider trading has been around for centuries, with some corruption cases becoming notorious. For instance, in the 19th century, prominent figures like William Tell O’Reilly and Cornelius Vanderbilt were accused of engaging in insider trading, which resulted in numerous investigations and convictions.
In recent times, insider trading remains a prominent issue. Companies require insider trading policies that are comprehensive and enforced, with rigorous due diligence and the presence of compliance staff to ensure proper adherence. This is in addition to monitoring by outside entities such as the Securities and Exchange Commission and exchanges. Final responsibility for preventing, detecting, and managing insider trading violations rests with the corresponding corporate boards who are responsible for their companies’ activities.
The primary advantage of insider trading is that it allows corporations to benefit from individuals having access to information before it becomes public. Because of their knowledge, such persons can make well informed decisions, which can help companies to stay ahead of their competitors. In addition, insiders have access to company’s confidential information and accordingly they can make themselves or their companies beneficial investments.
In spite of the acknowledged benefits, insider trading has become a major issue in the business world. Many experts argue that insider trading limits the liquidity of financial markets, as it can create an unfair advantage and it is thus almost impossible to compete on an equal footing with those who have privileged information. The U.S. has historically taken a hard stance against insider trading, with the government aiming to prevent market corruption and create fair and transparent conditions for all investors. As an example, the U.S. Sentencing Commission, set in 1987, increased the punishments for companies that violated insider trading laws.
Furthermore, as stated, insider trading allows persons with access to company confidential information to benefit by making profitable investments. This means individuals who do not have access to such information may be at a disadvantage and be unable to obtain similar gains. This practice can result in a wide divide between those who have insider information and those who do not, further creating an unequal marketplace.
Moreover, certain governments may allow certain influential persons, such as government officials and related persons, to trade corporate securities. This is known as ‘political trading’ and in some cases it causes public distrust in the financial markets. It is noted that such individuals who are subject to information restrictions may still obtain otherwise confidential information from their contacts who may still have access to it. Additionally, trading on news is a form of trading based on non-public information and such trading is not illegal as long as the stock is not held for more than one day.
In conclusion, while the benefits of insider trading may appear attractive, there are significant risks and costs involved. Any corporation or investor faced with such decisions, must consider the consequences before engaging in insider trading activities.
