# Should insider trading be legal? **URL:** \ **Category:** Great Debates\ **Created:** [October 26, 2009, 12:58am UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121 "2009-10-26T00:58:12Z")\ **Posts on this page:** 20\ **Page:** 1
**Author:** ![Leaper](https://avatars.discourse-cdn.com/v4/letter/l/4bbf92/32.png) [@Leaper](https://boards.straightdope.com/u/Leaper)\ **Post date:** [October 26, 2009, 12:58am UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/1 "2009-10-26T00:58:12Z")
[This Wall Street Journal opinion column says yes.](http://online.wsj.com/article/SB10001424052748704224004574489324091790350.html) And so do many libertarians. What do you think of his arguments? Are there better ones, libertarians? ---
**Author:** ![msmith537](https://avatars.discourse-cdn.com/v4/letter/m/d9b06d/32.png) [@msmith537](https://boards.straightdope.com/u/msmith537)\ **Post date:** [October 26, 2009, 2:47am UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/2 "2009-10-26T02:47:48Z")
I’m not sure. But you are talking to a guy who after seeing Wall Street wondered what the hell was so morally wrong with Gordon Gekko buying crappy-ass failing Blue Star Airlines instead of letting it’s unions continue to bleed the company dry with their bloated pension funds. ---
**Author:** ![panache45](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/panache45/32/64_2.png) [@panache45](https://boards.straightdope.com/u/panache45)\ **Post date:** [October 26, 2009, 4:38am UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/3 "2009-10-26T04:38:43Z")
If somebody tipped me off about a stock, and I trusted that person’s judgment, I’d be a fool not to act on that knowledge. A free market shouldn’t be rewarding fools. ---
**Author:** ![elucidator](https://avatars.discourse-cdn.com/v4/letter/e/8edcca/32.png) [@elucidator](https://boards.straightdope.com/u/elucidator)\ **Post date:** [October 26, 2009, 4:51am UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/4 "2009-10-26T04:51:28Z")
Heavens no, that would be unnatural, it would be like a pack of wolves rewarding deer. ---
**Author:** ![Bryan\_Ekers](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/bryan_ekers/32/183_2.png) [@Bryan\_Ekers](https://boards.straightdope.com/u/Bryan_Ekers)\ **Post date:** [October 26, 2009, 5:05am UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/5 "2009-10-26T05:05:56Z")
Well, define “insider”. Should it be illegal for corporate lawyers and accountants to disclose (or personally profit on) information about their clients? Yes. Should someone who the lawyer tells be punished? Probably not. ---
**Author:** ![Iridescent\_Orb](https://avatars.discourse-cdn.com/v4/letter/i/9de053/32.png) [@Iridescent\_Orb](https://boards.straightdope.com/u/Iridescent_Orb)\ **Post date:** [October 26, 2009, 6:21am UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/6 "2009-10-26T06:21:02Z")
Legalizing insider trading would essentially transfer wealth from the average shareholder to corporate insiders who are in the know. I’d rather have the money in the average Joe’s (or Jolene’s) 401(k) or pension plan than lining an executive’s pockets. ---
**Author:** ![Tastes\_of\_Chocolate](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/tastes_of_chocolate/32/3232_2.png) [@Tastes\_of\_Chocolate](https://boards.straightdope.com/u/Tastes_of_Chocolate)\ **Post date:** [October 26, 2009, 6:59am UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/7 "2009-10-26T06:59:58Z")
If insider trading was legalized, I would be looking much harder at companies that pay dividends, and I’m probably not the only one. If I thought that it would be easy and legal for insiders to act upon knowledge that I don’t have, then I would assume that I’m not going to be making much money off the sale of my stocks. All of that would go to an insider. Instead, I would look for a company that pays dividends and plan on making profits that way. While that would probably mean a much less profitable stock market, it seems that that might actually lead to companies paying more attention to long term health/profitability, rather then just increasing the price of their stock. ---
**Author:** ![bengangmo](https://avatars.discourse-cdn.com/v4/letter/b/50afbb/32.png) [@bengangmo](https://boards.straightdope.com/u/bengangmo)\ **Post date:** [October 26, 2009, 10:53am UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/8 "2009-10-26T10:53:19Z")
No it shouldn’t be legal. Quite simple really - if you remember that insider trading refers to selling as well as buying. Do you really want the to CEO to offload to you 1 million shares of XCY corp the day before it tanks due to a legal scandal? The stock market is founded on the idea of “perfect information” right? That’s why there’s all those pesky reporting laws. If you are going to move to a model whereby there is imperfect info the market will fall over. ---
**Author:** ![msmith537](https://avatars.discourse-cdn.com/v4/letter/m/d9b06d/32.png) [@msmith537](https://boards.straightdope.com/u/msmith537)\ **Post date:** [October 26, 2009, 11:29am UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/9 "2009-10-26T11:29:35Z")
> [@Bryan\_Ekers](#): > > Well, define “insider”. Should it be illegal for corporate lawyers and accountants to disclose (or personally profit on) information about their clients? Yes. Should someone who the lawyer tells be punished? Probably not. Lawyers and accountants are restricted by privilege and non-disclosure agreements specific to their profession and client relationship in addition to any insider trading regulations. > [@bengangmo](#): > > The stock market is founded on the idea of “perfect information” right? That’s why there’s all those pesky reporting laws. If you are going to move to a model whereby there is imperfect info the market will fall over. It’s an interesting theory though. In theory, we make information less perfect by restricting it. A CEO unloading a million shares in and of itself is a pretty strong bit of information. My understanding has been that we have insider trading laws out of a sense of “fairness”. ---
**Author:** ![Robot\_Arm](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/robot_arm/32/18280_2.png) [@Robot\_Arm](https://boards.straightdope.com/u/Robot_Arm)\ **Post date:** [October 26, 2009, 11:44am UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/10 "2009-10-26T11:44:27Z")
From the link: > [@](#): > > Suppose that unscrupulous management drives Acme Inc. to the verge of bankruptcy. Being unscrupulous, Acme’s managers succeed for a time in hiding its perilous financial condition from the public. During this lying time, Acme’s share price will be too high. Investors will buy Acme shares at prices that conceal the company’s imminent doom. Creditors will extend financing to Acme on terms that do not compensate those creditors for the true risks that they are unknowingly undertaking. Perhaps some of Acme’s employees will turn down good job offers at other firms in order to remain at what they are misled to believe is a financially solid Acme Inc. Interesting. I propose we solve this problem by requiring every executive of every publicly traded company to have a live webcam with him at all time. There can be no insider trading if there are no insiders. The market can react instantly to every minute change in the company’s prospects. Think the _Wall Street Journal_ would go along with that? ---
**Author:** ![BwanaBob](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/bwanabob/32/2985_2.png) [@BwanaBob](https://boards.straightdope.com/u/BwanaBob)\ **Post date:** [October 26, 2009, 1:23pm UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/11 "2009-10-26T13:23:41Z")
The author of that article is surprisingly ignorant/naive. Can you imagine how many execs would deliberately cause scandals in order to capitalize by selling short? It would be a never-ending revolving door of misbehavior. Instead of being “quickly and accurately” priced, the prices would become completely untrustworthy. ---
**Author:** ![Dick\_Dastardly](https://avatars.discourse-cdn.com/v4/letter/d/c4cdca/32.png) [@Dick\_Dastardly](https://boards.straightdope.com/u/Dick_Dastardly)\ **Post date:** [October 26, 2009, 4:31pm UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/12 "2009-10-26T16:31:21Z")
Tomorrow they’ll have an op-ed calling for ending any transparency in derivatives markets, scrapping all bank capital requirements and ending all Federal oversight of the financial industry. The WSJ editorial/op-ed side of the paper really is a parallel universe. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [October 26, 2009, 4:41pm UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/13 "2009-10-26T16:41:34Z")
I’d like to point out that the author’s example assumes that the company is breaking accounting laws and then goes from there. Why not write an article arguing for more rigorous accounting and disclosure laws? In answer to the OP - No. I’ve read numerous articles arguing for insider trading and failed to be convinced that the good outweighs the bad. The author doesn’t address the effect on (or even mention) [liquidity](http://en.wikipedia.org/wiki/Market_liquidity). Much of the liquidity being bid/offered at all times in stocks comes from market makers. At all times, they are both willing to buy stock and sell/short stock. Market makers, in theory, don’t care about the direction of the stock price movement. Rather, they hope to buy and sell in equal amounts on both the sell side and buy side thus capture the [spread](http://en.wikipedia.org/wiki/Bid-offer_spread). If insider trading were allowed, it’s all but guaranteed market makers would widen the spread of their quotes and be less willing to trade larger sizes. They wouldn’t want to get run over and left holding the bag when some insider comes in to buy/sell a massive amount of stock. As a result transactions costs would go up for everyone. ---
**Author:** ![BrotherCadfael](https://avatars.discourse-cdn.com/v4/letter/b/977dab/32.png) [@BrotherCadfael](https://boards.straightdope.com/u/BrotherCadfael)\ **Post date:** [October 26, 2009, 8:21pm UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/14 "2009-10-26T20:21:50Z")
I think at least one issue is the definition of “insider”. I’ve never been able to understand why Martha Stewart was accused, much less convicted of insider trading. As I understand it, she was not accused of trading based on her knowledge of the workings of her own company (which would certainly be insider trading), but was accused of buying or selling stock in a firm to which she had no business relationship other than owning stock. Supposedly a friend who was employed by that company told her something about the company’s affairs, and she traded stock based on that information. But, so what? Her friend had a fiduciary responsibility to his stockholders, and couldn’t trade on this information, but she had no such duty. It seems to me the wrongdoing was his, not hers. Perhaps it makes a difference how the information was passed to her. If the friend gave her a hot tip: “sell our stock, it’s about to take a big hit because we lost the Alucard account”, then perhaps I can see it. If she was just having a drink with her friend and he said something like: “Jeeze, what a day I’ve had - my kid got busted for pot, and my boss dumped on me because I screwed up the Alucard acquisition, and then I had a flat on the way home”, then I think we have something different. ---
**Author:** ![Nobody](https://avatars.discourse-cdn.com/v4/letter/n/94ad74/32.png) [@Nobody](https://boards.straightdope.com/u/Nobody)\ **Post date:** [October 26, 2009, 8:55pm UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/15 "2009-10-26T20:55:42Z")
Listening to NPR a day or two ago they said that the SEC is resistant to narrowly defining what insider trading is for fear that if there’s a specific definition then people will more easily be able to get around it. And as for the OP, I don’t think insider trading should be made legal. ---
**Author:** ![hansel](https://avatars.discourse-cdn.com/v4/letter/h/6bbea6/32.png) [@hansel](https://boards.straightdope.com/u/hansel)\ **Post date:** [October 26, 2009, 9:52pm UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/16 "2009-10-26T21:52:36Z")
> [@BrotherCadfael](#): > > As I understand it, she was not accused of trading based on her knowledge of the workings of her own company (which would certainly be insider trading), but was accused of buying or selling stock in a firm to which she had no business relationship other than owning stock. > > Supposedly a friend who was employed by that company told her something about the company’s affairs, and she traded stock based on that information. But, so what? Her friend had a fiduciary responsibility to his stockholders, and couldn’t trade on this information, but she had no such duty. It seems to me the wrongdoing was his, not hers. Say there’s no penalty for acting on insider information if you’re not literally an insider. Then all an insider has to do, rather than trade himself, is find a pseudo-insider, a friend who’ll execute the proper trades. The effect of insider trading is then felt, and it beggars belief that there wouldn’t be some quid pro quo for the literal insider to divulge the information in the first place, with that quid pro quo being more easily disguised (say, an insider tip going the other way). When I worked at RSA Security, we got the scary insider trading lecture, and they were very explicit that you couldn’t hope to evade the SEC by using a proxy to execute insider trades. The basic problem with insider trading is that makes it impossible for outsiders to invest effectively because they lack knowledge that’s moving the market. If everyone is insider trading through friends and family, you get the same effect as if they’re doing it themselves. ---
**Author:** ![BrotherCadfael](https://avatars.discourse-cdn.com/v4/letter/b/977dab/32.png) [@BrotherCadfael](https://boards.straightdope.com/u/BrotherCadfael)\ **Post date:** [October 26, 2009, 11:27pm UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/17 "2009-10-26T23:27:24Z")
> [@hansel](#): > > Say there’s no penalty for acting on insider information if you’re not literally an insider. Then all an insider has to do, rather than trade himself, is find a pseudo-insider, a friend who’ll execute the proper trades. The effect of insider trading is then felt, and it beggars belief that there wouldn’t be some quid pro quo for the literal insider to divulge the information in the first place, with that quid pro quo being more easily disguised (say, an insider tip going the other way). I understand that, but what are the limits? If I happen to be sitting behind a couple of officers of MegaCorp on the subway, and I overhear them talking and trade on that information, am I liable? Again, it seems that the wrongdoing is on their part, not mine. ---
**Author:** ![Trom](https://avatars.discourse-cdn.com/v4/letter/t/958977/32.png) [@Trom](https://boards.straightdope.com/u/Trom)\ **Post date:** [October 26, 2009, 11:35pm UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/18 "2009-10-26T23:35:17Z")
edit: Nevermind ---
**Author:** ![ToughLife](https://avatars.discourse-cdn.com/v4/letter/t/8797f3/32.png) [@ToughLife](https://boards.straightdope.com/u/ToughLife)\ **Post date:** [October 26, 2009, 11:49pm UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/19 "2009-10-26T23:49:37Z")
> [@](#): > > I’ve never been able to understand why Martha Stewart was accused, much less convicted of insider trading. Nitpick : Marta has never been convicted of insider trading rather she’s been convicted of [conspiracy, obstruction of justice, and two counts of making false statements](http://en.wikipedia.org/wiki/ImClone_stock_trading_case) other than that I agree with you. ---
**Author:** ![BrotherCadfael](https://avatars.discourse-cdn.com/v4/letter/b/977dab/32.png) [@BrotherCadfael](https://boards.straightdope.com/u/BrotherCadfael)\ **Post date:** [October 27, 2009, 12:58am UTC](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121/20 "2009-10-27T00:58:23Z")
> [@ToughLife](#): > > Nitpick : > Marta has never been convicted of insider trading rather she’s been convicted of [conspiracy, obstruction of justice, and two counts of making false statements](http://en.wikipedia.org/wiki/ImClone_stock_trading_case) > > other than that I agree with you. Oh, that’s right! Making false statements about a crime she was never charged with. Gotcha - so to speak. [Next page](https://boards.straightdope.com/t/should-insider-trading-be-legal/515121.md?page=2)