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?

Résumé du document

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.

Extraits

[...] Despite the weight of several arguments that underline the absence of requirements concerning equity and fairness in business ethics, insider trading has often been regarded as morally wrong or even sometimes as morally prohibited. Therefore several laws prohibiting insiders from trading on undisclosed information have been enacted in most securities markets to eradicate this practice and turn securities trading into a fair game for all the participants. Even if the legislations against insider trading have been strengthened over the last decades, empirical researches call into question their efficiency because of the abnormal profits of some insiders and the continuous share price movements around corporate announcements that can still be noticed in various securities markets[12]. [...]

[...] 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? 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. [...]

[...] In fact legislators have the moral obligation to make sure that the interests of all the shareholder groups are taken into account and to resist to the pressure put by greedy insiders. BARRY, V., Moral issues in business, Wadsworth Publishing Company, USA TOMASIC, R., Casino capitalism? Insider trading in Australia, Australian Institute of Criminology, Australia MACHAN, T., What is morally right with insider trading, Public Affairs Quarterly, Vol USA DOLGOPOLOV, S., Insider trading, [Accessed 30.12 .08]. MANNE, H., Insider trading: Hayek, virtual markets, and the dog that did not bark, Journal of Corporation Law, Vol George Mason University School of Law, USA HARRIS, L., Insider trading, Trading & Exchanges, Oxford Press, UK TOMASIC, R., Casino capitalism? [...]

[...] Insider trading in Australia, Australian Institute of Criminology, Australia DOLGOPOLOV, S., Insider trading, [Accessed 30.12 .08]. SEYHUN, N., Investment intelligence from insider trading, MIT Press, USA WONG, E., Investigation of market efficiency: an event study of insider trading in the stock exchange of Hong Kong, Stanford University, USA MANNE, H., Insider trading: Hayek, virtual markets, and the dog that did not bark, Journal of Corporation Law, Vol George Mason University School of Law, USA DUNBAR, C., Benefits of insider trading, National Post, Canada .1999. [...]

[...] The insider acts with prudence and business acumen; therefore 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”[9]. Advocates of insider trading argue that equality and fairness have never been features of business ethics since no moral principle requires that someone reveals to the others information that he has obtained honestly ahead of them when he has no specific duty to do it. Supporting insider trading in securities markets just because similar practices are legal in other markets is not enough to justify these economic transactions from a moral perspective. [...]