Essay On Insider Trading

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Recommended: Arguments in favour of insider trading

Introduction
Insider trading regulations prohibit insiders of a corporation from trading in their company’s stock without prior disclosure of any material nonpublic information. Yet the securities industry is the only market where transactions based on unequally distributed information are considered to be so unfair and inequitable that they need be eliminated by regulation (consider real estate, labor, commodities, etc.). Despite the numerous advantages of insider trading, including improved market price stability, increased transparency, earlier fraud detection, and above all efficient incentive compensation for employees, regulations have evolved on the false premise that insider trading undermines investor confidence in the fairness and integrity of the securities markets. Prior to the emergence of these federal regulations, early common law as well as publicly traded corporations and stock exchanges all permitted insider trading because it does not cause harm to non-inside investors. Furthermore the market consequences of insider trading regulations have proved costly and ineffective. Insider trading regulations should be repealed so that the market pricing mechanism and the entrepreneurial incentives of insider trading may prosper in a free market environment.
Background
Before S.E.C. vs. Texas Gulf Sulphur (2nd Cir. 1968), the Securities Acts of 1933-1934 had evolved from “passively requiring full disclosure” to involving “corporate governance, accounting takeovers, investment banking, financial analysis, corporate counsel, and, not least, insider trading”. Yet, in these proceedings Congress refused an early draft of the Securities and Exchange Act that contained a provision outlawing insider trading, perhaps because it...

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...ng to insider trading regulations. In addition, tax payer money funds the SEC’s apparently ineffective operation. This constitutes a serious misallocation of capital; this money could potentially be much better spent simply preventing and uncovering traditional fraud much like the recent Madoff scandal.
Conclusion
SEC regulations of insider trading lack material justification as insider trading is not unfair or inequitable. Furthermore the market effects of such regulations are undesirable and are empirically unfair and inequitable to average traders, insiders and non-insiders. Moreover, they are ineffective and costly. Meanwhile, the benefits of insider trading, including efficient market valuation, price stability, fraud detection and entrepreneurial compensation are important aspects of a healthy functioning capitalist economy that should be permitted to prosper

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