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ABSTRACT. Despite the fact that a number of economists sider Yet a number of economists and
trading.
and philosophers of late defend insider trading both as a
philosophers of late defend this kind of activity both
viable and useful practice in a free market and as not as a viable a as
practice in free market and
and useful
immoral, I shall question the value of insider trading both a that is not
immoral. In response to these
practice
from a moral and an economic of view. I shall
point argue defenses I want to
question the value of insider
that insider trading both in its present illegal form and as a amoral and an economic
trading both from point of
market mechanism undermines the efficient and
legalized view. I shall argue that insider trading both in its
proper functioning of a free market, thereby bringing into as a market me
its own raison d'etre. It does so and is present illegal form and legalized
question economically
chanism violates the privacy of concerned parties,
inefficient for the very reason that it is immoral. Thus this
cannot be either from an economic or a destroys competition, and undermines the efficient
practice justified
moral point of view. and proper functioning of a free market, thereby
into question its own raison d'etre. It does
bringing
so and therefore is inefficient for the
economically
Insider
trading
is the reverse of
speculation.
It is reward very reason that it is immoral.
without ? and injury done to That insider trading as an illegal activity interferes
risk, wealth generated
? an unfair . . . with the free market is pretty obvious. It is like a
others in information
by advantage [T]he
core
principle is clear: no one should profit from game where there are a number of players each of
not to
represents a constituency. In this sort of game
of information available whom
exploitation important
the public.1 there are two sets of rules ? one ostensive set and
another, implicit set, functioning for some of the
Insider in the stock market is characterized
trading In this some of the are
as the or of shares of stock on the basis players. analogy implicit rules
buying selling outlawed, the to them
known to the trader or to a few yet big players manage keep
of information only
of insider trading it is com operative and actually often in control of the game.
persons. In discussions But not all the players know all the rules being
monly assumed that the privileged information, if
or at least are most
known to others, would affect their actions in the played they ignorant of the
ones, ones that determine the wins
as well, in not be important big
market although theory this need and big losses. So not all the players realize what
the case. The present guidelines of the Securities and
rules actually manipulate the outcome. Moreover,
most forms of in
Exchange Commission prohibit some of the most
partly because important func
rules are some who do know
tioning illegal, players
the implicit rules and could participate do not. Thus
Patricia H. Werhane isWirtenberger Professor of Philosophy at
not everyone in a to do so
one position plays the trading
Loyola University of Chicago. She is of thefounding same
game the way. The game, then, like the mani
members of the Societyfor Business Ethics. Her publications
include Philosophical Issues in Art, Ethical Issues in pulated market that is the outcome, is unfair ?
unfair to some of the players and those they repre
Business, coeditedwith Tom Donaldson, Persons, Rights and
sent ? unfair not some of the
Corporations, Philosophical Issues in Human Rights, only because players
editedwith D. Ozar andA. R. Gini. She is currentlyworking on are not to the most
privy important rules, but also
a book onAdam Smith. because these "special" rules are illegal so that
they
leged information. The market would function more Henry Manne argue that insider is beneficial
trading
efficiently since the best-informed and those most to outsiders. Whether it is more beneficial than its
able to gain information would be allowed to exer absence is a question Manne admits he cannot
cise their fiscal answer. But Manne
capabilities. The market itself would defends insider trading because,
the excesses of insider I use he argues, it reduces the factor of chance in trading
regulate alleged trading.
the term excesses because to this both for insiders and outsiders. When shares are
"alleged" according
line of reasoning, if the market is
functioning prop traded on information or
probabilities rather than on
or losses are created as a result rumor or whim, reflects more accurately
erly, whatever gains the market
of open competition are a natural outcome of that the actual economic status of that company or set of
are not excesses at all, and even
competition. They companies. Because of insider trading, stock prices
tually the market will adjust the so-called unfair go up or down according to real, factual informa
gains of speculators. tion. Outsiders benefit from this because stock prices
There are several other defenses of insider trading. more
closely represent the worth of their company
First, insider
information, e.g., information about a than shares not affected by insider Insider
trading.
new stock issue, layoffs, etc., then, the fairness of the
merger, acquisition, trading, actually improves
information known to a few, should be and market, to this argument, in
only according by reflecting
remain private. That information is the property of stock prices the fiscal realities of affected corpora
those engaged in the activity in question, and they tions all traders of the stocks.2
thereby benefitting
should have the right to regulate its dissemination. These for insider are persua
arguments trading
Second and conversely, even under ideal circum sive. Because outsiders are not harmed
allegedly
stances it is impossible either to disseminate infor from privileged information not available to them
mation to all interested parties equally and fairly, or and may indeed benefit from insider trading, and
alternately,
to
preserve absolute secrecy.
For exam because the market punishes rash speculators, insider
in a new stock or on a stock cannot be criticized as In fact, it
ple, issuing deciding trading exploitation.
a number of in the transaction from makes the market more efficient. as these
split, parties Strong
brokers to printers learn about that information in arguments are, however, there is something amiss
advance just because of their participation in
making with these claims. The error, I think, rests at least in
this activity a reality. And there are always share part with the faulty view of how free markets work,
holders and other interested parties who claim they a view which stems from a that
misinterpretation
did not receive of such an activity or did
information derives from a of Adam Smith and
misreading
not receive it at the same time as other shareholders a of Smith's notions of self
specifically misreading
even when the information was disseminated to interest and the Invisible Hand.
everyone at the same time. Thus it is, at best, The is this. It is sometimes
misinterpretation
difficult to stop insider trading or to judge whether a assumed that an unregulated free market, driven by
certain kind of knowledge is "inside" or competition and self interest, will function auto
privileged.
This is not a good reason to defend insider trading as nomously. The idea is that the free market works
economically
or
morally desirable, but it illustrates like the law of gravity ? autonomously
something
the difficulties of defining and controlling the phe and anonymously in what Iwould call a no-blooded
nomenon. fashion. The interrelationships created by free mar
Third, those who become to inside infor ket activities based on self-interested are
privy competition
mation, even if they take advantage of that infor similar to the between the
gravitational relationships
1 Department ofPhilosophy,
Will, Your on Guiliani', Newsweek,
George 'Keep Eye
Loyola University ofChicago,
March 2,1987, p. 84. 820 N.
2 See Michigan Avenue,
Henry Manne, InsiderTrading and theStockMarket (The
Free Press, New York, 1966), especially Chapters X and XI. Chicago,
3 Adam USA.
Smith, The Wealth ofNations, ed. R. A. Campbell