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Insider trading is the trading of a public company's stock or other securities (such as bonds or stock options) based on material, nonpublic information about the company.[1] In various countries, some kinds of trading based on insider information is illegal. The rationale for this prohibition of insider trading differs between countries/regions. Some view it as unfair to other investors in the market who do not have access to the information, as the investor with inside information could potentially make larger profits than an investor (without such information) could make.[2] However, insider trading is also prohibited to prevent the director of a company (the insider) from abusing a company's confidential information for the director's personal gain.[3]
The rules governing insider trading are complex and vary significantly from country to country. The extent of enforcement also varies from one country to another. The definition of insider in one jurisdiction can be broad and may cover not only insiders themselves but also any persons related to them, such as brokers, associates, and even family members. A person who becomes aware of non-public information and trades on that basis may be guilty of a crime.
Trading by specific insiders, such as employees, is commonly permitted as long as it does not rely on material information not available to the general public. Many jurisdictions require that such trading be reported so that the transactions can be monitored. In the United States and several other jurisdictions, trading conducted by corporate officers, key employees, directors, or significant shareholders must be reported to the regulator or publicly disclosed, usually within a few business days of the trade. In these cases, insiders in the United States are required to file Form 4 with the U.S. Securities and Exchange Commission (SEC) when buying or selling shares of their own companies. The authors of one study claim that illegal insider trading raises the cost of capital for securities issuers, thus decreasing overall economic growth.[4] Some economists, such as Henry Manne, argued that insider trading should be allowed and could, in fact, benefit markets.[5]
There has long been "considerable academic debate" among business and legal scholars over whether or not insider trading should be illegal.[6] Several arguments against outlawing insider trading have been identified: for example, although insider trading is illegal, most insider trading is never detected by law enforcement, and thus the illegality of insider trading might give the public the potentially misleading impression that "stock market trading is an unrigged game that anyone can play."[6] Some legal analysis has questioned whether insider trading actually harms anyone in the legal sense, since some have questioned whether insider trading causes anyone to suffer an actual "loss" and whether anyone who suffers a loss is owed an actual legal duty by the insiders in question.[6]
- ^ "FCA Handbook". Retrieved 18 October 2024.
- ^ Directive 2014/57/EU of the European Parliament and of the Council of 16 April 2014 on criminal sanctions for market abuse (market abuse directive), vol. 173, 2014-04-16, retrieved 2024-10-18
- ^ "Chiarella v. United States, 445 U.S. 222 (1980)". Justia Law. Retrieved 2024-10-18.
- ^ "The World Price of Insider Trading" Archived 2018-05-03 at the Wayback Machine by Utpal Bhattacharya and Hazem Daouk in the Journal of Finance, Vol. LVII, No. 1 (February 2002)
- ^ Matthews, Dylan (2013-07-26). "Insider trading enriches and informs us, and could prevent scandals. Legalize it". The Washington Post. ISSN 0190-8286. Archived from the original on 2018-02-03. Retrieved 2018-02-02.
- ^ a b c Klein, Ramseyer & Bainbridge (2018), p. 481.