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Insider trading takes place when a few individuals make investment decisions based on exclusive information that is not in the public domain. Depending on the prevailing market conditions, the information can either lead to profits or prevent individuals from incurring losses.
Insider trading was not initially considered morally wrong, until the excesses of 1920 happened. This period was followed by depression and a change in public opinion. As a result, individuals who continued with the practice were penalized because it became morally wrong.
This essay discusses ethical problems associated with insider trading.
The first ethical problem associated with insider trading is deception. Insider trading has always been considered by courts as deceptive since deception is inherently wrong even without considering its harm to people.
The deception associated with insider trading has numerous problems, the most significant being that its deceptive nature is not easily identified. Insider trading laws insist that false documents should not be used to find liability.
Corporate insiders are therefore compelled by law to disclose the nature of their trade. Failure to disclose information about their trade might cause them to face legal sanctions. Companies are morally required to give shareholders information concerning their activities before they trade stocks.
The second moral problem associated with insider trading is that it causes harm to people. In this context, harm refers to the failure by a company to achieve satisfactory social good and welfare. In the market of securities, some people gain while others lose based on the prices they get.
Individuals who possess a lot of information about the market are better placed to get bargains and acquire good prices. Competing with corporate insiders therefore puts individuals at risk because insiders have a lot of information.
Individuals are morally required to protect themselves from the economic harm associated with insider trading. The practice is considered harmful because it denies the society social good. Sustainable existence of social good requires different people to cooperate in order to enhance credibility of the securities market.
Insider trading is also believed to deter investment. Researchers have discovered that capital cost goes down after introduction of laws that regulate insider trading. The implication is that a decrease in insider trading improves social welfare.
The third moral problem associated with insider trading is unfairness. This argument is based on the fact that insider traders reap unfair benefits at the expense of individuals they transact securities with.
The unfair advantage that they get over other individuals is possession of exclusive information that is not in the public domain. Buyers and sellers in a transaction of securities are separated by a remarkable inequality. Insider trading is considered unfair due to information gaps that exist between buyers and sellers.
However, unfairness can also be evaluated from a different perspective, which focuses on asymmetry of information that occurs as a result of unequal access of information.
In simple terms, insider trading is regarded as unfair since the insider trader benefits from information that is acquired in the wrong way. Inside information is only acquired from firms but insider traders steal it. As a result, they are prohibited from using information acquired illegally because it is unfair to other traders.
Insider trading makes people vulnerable to economic problems since corporate insiders justify their attempts to alter stock prices for their own benefits. The trade is therefore not only harmful, but also encourages exploitative relations, which are morally wrong.
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