Insider Trading - Should It Be Legalized?

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Insider Trading
Should it be legalized?

An objective look at the different arguments given by each side of the controversial topic of whether insider trading should continue to be illegal or not. Also included is a subjective view of the author’s stance on the subject. Insider Trading

Should it be legalized?

An objective look at the different arguments given by each side of the controversial topic of whether insider trading should continue to be illegal or not. Also included is a subjective view of the author’s stance on the subject. Mariah Frahm

2/24/2013
Mariah Frahm
2/24/2013

Table of Contents
Introduction2
Arguments For2
Market Efficiency2
Proprietary Research vs. Insider Information3
Victimless Crime3
Enforcement Issues3
Unknown Outcomes4
Arguments Against4
Market Inefficiency4
Failure of Duty5
Reduced Confidence and Potential Harm5
Information as Property5
Fairness5
Author’s Viewpoint6
Legal Issues6
Ethical Issues7
Conclusion7
Bibliography8

Insider Trading
Should it be legalized?
Introduction
Insider trading is commonly defined as trading in the stock of publicly held corporations on the basis of material, nonpublic information (Boatright, 2012). It was officially deemed a criminal act by the Securities Exchange Act of 1934 but there have been cases as early as 1909 of the United States Supreme Court ruling against people for insider trading. More recently there has been quite a bit of debate as to whether insider trading should remain a criminal act or if it should be legalized. This paper will outline a few of the arguments for and against the legalization of insider trading and will also take a look at the author’s opinions and arguments on the matter. Arguments For

Many experts believe that it is time to do away with the laws against insider trading. Not only are there flaws in the logic of the laws against insider trading, but there are also several ways in which legalizing it could actually help the market. These arguments focus on the legal side of insider trading, separate from the ethical side. Ethical issues with insider trading will be addressed in the next section as they are a major argument against the legalization of insider trading. Market Efficiency

While a perfectly efficient market can never be achieved, information is a large part of what makes the market as efficient as realistically possible. Getting information to the market as fast as possible helps to create that market efficiency and insider trading is just one of many ways to help expedite information and thus make the market more efficient (Roth, 2012). Several experts agree with this argument, such as Henry G. Manne, Peter-Jan Engelen, and Robert W. McGee who said in a 2008 Journal of Business Ethics article, "...Insider trading serves as a means of communicating market information, which makes markets more efficient...  ...Even if the insider is anonymous, an increase (or decrease) in demand for a particular stock will be noticed by the market, and the price will move accordingly..." (ProCon.org) Many of these experts agree that insider trading sends signs to other investors who react to them and help move the market to a more efficient state (Machan, 1996). Legalizing insider trading would allow for incentives and profits to be made from information which allows it to be more readily available and quickly spread amongst the market and will also decrease the profits made by insider trading due to the increase of people participating in the action (Roth, 2012). In contrast, keeping insider trading as illegal dampens the flow of information because most traders tend to follow the law and consider participating in insider trading as too risky to attempt to reap the benefits of it. Proprietary Research vs. Insider Information

There is a fine line and a gray area between what can be considered research and information and that area can often become blurred...
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