We live in a world where it’s crucial to have the best and most accurate information. Considering this, it seems that legislators would try to encourage an environment in which the free flow of information is fostered and encouraged. Most of the time.
The glaring exception is legislation concerning insider trading.
It’s usually defined as the act of making a trade in the stock market using information that isn’t currently available to everyone else. Also, it’s illegal. At first glance, this is somewhat logical.
People shouldn’t be allowed to make profits because they have an advantage over other people, right?
Wrong. Our development depends on people’s willingness to share information. As a result, we have numerous venues dedicated to help people do just that. We have newspaper, television and social media. We also have the stock market. The stock market is perhaps the best definition of information exchanges.
Every second the price fluctuates because of the large amount of information constantly shared. Thus, a company’s worth is determined at that moment. This seems like a good system— it just hinges upon the market having accurate information on the current state of the company.
The main argument against insider trading is that it concerns information that is not public. However, it’s not illegal to make that information public. If someone uses a talk show or newspaper article to do it, they wouldn’t be prosecuted.
So why is it fair for someone to be prosecuted for choosing to share that information through the market instead? In some ways, it’s even more public.
There’s no guarantee that every person trading the stock of a given company would read a certain newspaper article or watch a video, but if the information is shared through the market, everyone can see it. This is not the only way to share this information, but it’s probably the best way.
Isn’t it wrong that the people of insider trading make a profit from it? No, not really.
The entire point of trading stocks is to make a profit. This is a good thing. It’s an incentive to share information, which benefits everyone. So it’s natural that anyone trading stocks should make a profit out of it, and so should insider traders because insider trading isn’t a victimless “crime.” It helps people.
However, there are victims of insider trading being illegal. The victim is the person who lost his retirement savings when he unwittingly put money into a company doomed to fail, the person who lost money trying to trade off of what was incomplete information or the person who spent years in jail for making a stock trade.
One of the biggest financial scandals in recent times concerned Enron Corporation, an energy and commodity company. The company’s management schemed to mislead the public about its true financial situation, but they couldn’t keep it up forever. On Dec. 2, 2001, the company declared bankruptcy. Shares plummeted to about 26 cents and thousands of people lost their investments.
What if the market had accurate information on the true value of the company? Do we want a free flow of information, so that prices can move smoothly and react to each development, or have Enron, where the facade that had been erected for years crumbled in mere months?
If the market’s information was correct, people would have had time to see what was truly happening and they could have gotten out in time.
Would that have been a bad thing? The current legislation says yes, but perhaps it’s time to rethink it.