Essay on Insider Trade

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Business ethical issues with insider trading.

From a business perspective, there are still ethical issues with insider trading. Businesses exist to make money. It's a fact that a capital market accepts and is a cornerstone of American culture. But a few making money at the expense of the many raises not only moral ethical issues, but also business issues. When investors don't have the money to invest, or they don't have confidence in the market, they don't invest. Undermining that confidence can have severe financial repercussions, as well as affecting the market as a whole; in which case the advantage of a few comes at the cost of many-a cost that can continue for years.

Insider trading has a bad reputation and it is generally assumed that it should be banned. Nevertheless, the ethical and economic question whether insider trading is harmful or not is still an active. In this discussion economists often resort to ethics as the ultimate argument for a prohibition of insider trading, but rarely get far beyond simple exclamations as “it’s just not right” or “it’s unfair”. On the other hand the ethical analysis of the problem offered in Ma and Sun (1998) is sometimes hampered by a lack of empirical knowledge about the impact of insider trading and postulates all kinds of effects, e.g. a negative impact on investor confidence, for which the indications are lacking.
Duty of trust or confidentiality.
Insider trading also violates the duty of trust or confidentiality that one individual or business entity owes to another. In a duty of trust argument, the person or entity that has access to proprietary information owes a duty of trust not to use that information against the people who don't possess it. In a capital market, this takes the form of insider trading. Sharing insider information that leads to investment decisions is a direct breach of confidentiality.

Moral ethical issues with insider trading.
While moral ethical considerations of insider stock trading aren't the primary focus of ethical discussions, they still play a part in evaluating insider trading. Essentially, the moral ethical arguments all come down to one basic fact: It's wrong for investors to take advantage of other investors. In a level playing field where everyone has the same information, investment success is based on skill.

In a market rife with insider trading, people can use secret information to take advantage of their opponents. This means that their gain comes at the cost of someone else's loss; not a loss based on skill, but a loss based on having information that someone else doesn't have. Abusing this information is morally wrong, as it violates the principals of fairness upon which the capital market is based.

Why insider trading unethical
There are many common theories as to why insider trading unethical. McGee addresses the other side of this argument in his article. One of the common arguments against insider trading is “envy and the labor theory of value” on which he states, “Many of those who would like to see all insider traders punished have an anti-capitalistic mentality. They just do not like the free enterprise, Gatton Student Research Publication | 5 think it is inherently evil, and think that individuals should not be able to make millions of dollars with so little apparent effort” (McGee 7). This group believes that insider trading should be illegal and is unethical because some people are able to make large amounts of money with little to no effort, which in their minds is wrong.
This argument also has two variants - the level playing field argument and the fairness argument. Both basically say that insider trading “is just not right” (McGee 10), and “it is unfair” to give some people an advantage and not others. McGee acknowledges that a level playing field is applicable in many cases such as sports, but not in economics. He turns around the fairness argument by saying that it would be unfair to level the playing
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