The Advantages and Disadvantages of Insider Trading


According to this website, insider trading describes any transactions in securities such as stocks and shares by persons having access to privileged information not available to the general investing public, and who stand a financial gain from this knowledge. Strictly speaking, the term insider refers to someone who owes a fiduciary duty to a corporation and its current and potential shareholders. This term, however, has occasionally been expanded to include a wide range of persons with informational advantages, such as third parties with trade relationships with a corporation (e.g. trade suppliers, subcontractors), security analysts to whom information has been disclosed selectively, and even persons who accidentally acquired a piece of non-public information. Yet, the latter view fails to incorporate the situation that the informational advantages can be properly obtained. This is particularly important as this setting may involve the securities analysts who are typically viewed as the key force i!

n keeping the market efficient. Nonetheless, the two contexts of insider trading and selective disclosure should be sharply distinguished and separately addressed by the law.

Traditionally, much of the regulation of insider trading has been based on the premise that it dishonours the fundamental fairness principle which requires a level playing field in which no investor can exploit improperly obtained informational advantages. This is the legal view of insider trading, which judges insider trading on the basis of trade on material information by a broad group of insiders or their tippees. More recently, however, the free-market approach has been developed as an alternative. The free-market approach is based primarily on the claim that insider trading enhances market efficiency by inducing secretive insiders to trade rather than requiring them to abstain, allowing in this way, markets to process new information.

This report is an attempt to address the main issues that arise in regulating trade based on privileged, non-public information, in the light of the Fairness vs. Efficiency debate. In doing so, we are going to distinguish between different forms of insider trading, emphasising on

Psst... 98% of Kibin users report better grades! Get inspiration from over 500,000 example essays.