The Morality and Legality of Insider Trading
Undeniably, the rate of unethical behaviors in international corporate organizations seems to have risen to an uncontrollable rate. For instance, insider trading that does not involve the abuse of dominant positions or manipulation of financial marks is often termed illegal but hardly immoral. Among the major proponents of insider trading are that it promotes the spirit of enterprise and economic efficiency but at the same time, it leads to unequally access to information and breach of fiduciary duty (Juan, 2011). It is highly believed that insiders are capable of undertaking strategic trading activities to prevent them from revealing their secret information to other traders as well as enabling the insider traders to avoid being detected by exchange surveillance departments. As such, prevention of detection calls for the determination of some element of insight to ascertain the elements that are more likely to be detected. This shows that although insider trading is an illegal activity, insider traders find it hardly immoral.
Before I can commence arguing about the legality and morality of insider trading, it is conventional wisdom to understand its meaning, and as well explain the scope and context of its applicability in this argument. Insider trading in business ethics refers to the ability to perform business transactions using prior information that is yet to be publicized to the public (Ben, 2010). This information is often obtained from non-public sources that include private acquaintances and using it to enhance an individual’s financial knowledge. As such, key individuals or employees benefit from the information that is yet to be publicized. This might seem immoral but it is illegal depending on the fraudulent manner in which it is conducted given that the individual who has obtained the information is charged with a fiduciary responsibility to share it with clients. The unshared information is also susceptible to being stolen.
According to laws governing the land, insider trading is outright unethical and illegal (Juan, 2011). However, a plethora of moral arguments that support insider trading provided it falls within the context of preventing market manipulation or abuse of dominant position. Speaking of the morality of insider trading, the moral arguments that support this view are several. First, the contenders for insider trading believe that the process of gathering insider information is tiresome because it calls for hard work in addition to consuming a lot of time. Second, regular investors are believed to have acquired a world of information and therefore, making their level of information certifiably invariable. Third, insider trading requires some elements of intelligence and hence, making it unfair to prohibit the use of intelligence obtained from valuable research.
Fourth, it might also be one’s good fortune or achievement to study the opportunities that stand ahead of others thereby making it morally upright. In supporting this view, it seems prudent to act on such information to exhibit exemplary business acumen provided it does not violate the rights of other people along the way. It is so because the individuals revealing the information have the right to reveal the information because they have obtained it ahead of others. Fifth, it is clearly unobjectionable in utilizing specially obtained information for purposes of improving one’s own benefit despite the notion that the same information could also benefit other individuals if it were made available to them. Sixth, success in trading entails taking advantage of special but rare opportunities as soon as they present themselves. To this purpose, it is a good sign for insider traders to utilize such opportunities as a sign of good judgment for their trading activities instead of utilizing it as a sign of deception or unfairness. Finally but yet importantly, claiming that insider trading is associated with the confusion of market trading activities is wrong. This can be attributed to the fact that every trader in financial markets possesses the purpose of acquiring a unique chance and capitalizing on that chance. Based on such arguments, it is advisable to understand the ethics that govern financial markets before commencing on trading.
The morality of the arguments can be summarized in the following scenario. Picture a situation whereby X is a friend of the Company XYZ CEO and has learned from the CEO that Company XYZ plans to expand its regional operations and international presence. Based on this insight, X decides to increase the rate of his investments in Company XYZ by purchasing stocks of the company in anticipation for the increased value once the expanded operations are finalized or before the information is revealed to the public. In this situation, X has not defrauded or deceived anyone. This means that X is acting on the “insider” information that was freely provided. The immorality of such an instance can arise when the outcome of such a situation adversely affects in part due to financial advantage and in part due to unfairness. For instance, it might result to loss or injury to outsiders despite the insider getting access to the information while the outsiders did not understand. The lack of information on the part of outsiders increases their susceptibility to financial losses, risks, or failure to utilize on the opportunities that might present themselves in the market. This can be attributed to the fact that the outsiders do not know the information known to the insiders thereby leading to harm. Nonetheless, if the insider’s prior access to the information does not present any impact on the financial capability or position of others, then the activity can be said to be morally right.
Speaking of the legality of insider trading, considering it illegal or legal inclusive of the associated penalties can be quite a complex matter altogether. For instance, several factors have to be considered before determining the legality of insider trading. Such factors include but they are not limited to the prevailing relationship between the insider and the company, the issue that transpired before the revelation of the information, and the nature of the trade (Ben, 2010). Insider trading becomes illegal when trading activities by corporate individuals are accurately reported to authorities responsible for regulating financial markets such as the Securities Exchange Commission (SEC). For instance, when insiders within the corporate circle such as directors, employees, and officers purchase and sell stock in their own companies and later reveal the nature of their trading publicly to authorities such as the Securities Exchange Commission (SEC), then such type of insider trading becomes legal. However, rules set by financial regulation authorities such as the SEC prohibits insider trading activities in situations where insider traders breach fiduciary responsibility by failing to reveal information, compromising the trust and confidence of outsiders, and as well as possessing information that might affect the security of the public. The case on security of outsiders occurs when corporate individuals act on information acquired from confidential sources. Tipping relatives and close friends on matters relating to trading activities is also illegal.
On the contrary, intellectual and moral disdain considers insider trading morally wrong from the commercial or economic perspective. Many a person who are against insider trading consider it a wrong route towards the attainment of commercial success even though it might seem utterly misguided from the part of contenders for insider trading. Accordingly, insider trading fulfills satisfies one moral merit whereby benefit can be sought through shrewdness and ingenuity provided all ethical laws are adhered.
All said and done, it is undeniably true that “Insider trading which does not involve market manipulation or abuse of dominant position may well be illegal but it is hardly immoral. The morality of insider trading holds so long as it does not involve the abuse of dominant positions or manipulation of financial marks. Insider trading is also beneficial if it promotes the spirit of enterprise and economic efficiency. Speaking of its legality, several factors have to be considered before determining the legality of insider trading and they include but they are not limited to the prevailing relationship between the insider and the company, the issue that transpired before the revelation of the information, and the nature of the trade. Finally, insider trading must conform to the rules and regulations specified by financial authorities such as the Securities Exchange Commission (SEC) for it to be legal.
Ben T., (2010) “International business ethics,” Journal of International Trade Law and Policy,
9 (3), pp.236 – 255
Juan W., (2011) “Transient institutional investors and insider trading signals,” International
Journal of Accounting and Information Management, 19 (2), pp.118 – 145