Insider trading

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 many countries, some kinds of trading based on insider information are illegal. The rationale for this prohibition of insider trading differs between countries and 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 can potentially make larger profits than an investor without such information.^[2] However, insider trading is also prohibited to prevent the directors of a company (the insiders) from abusing a company's confidential information for the directors' personal gain.^[3]

The rules governing insider trading are complex and vary significantly from country to country, as does the extent of enforcement. 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. In some jurisdictions, a person who becomes aware of non-public information and then 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 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 such 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 concluded that illegal insider trading raises the cost of capital for securities issuers, thus decreasing overall economic growth.^[4] On the other hand, some economists, such as Henry Manne, have argued that insider trading should be allowed and can, in fact, benefit markets.^[5]

There has long been "considerable academic debate" among business and legal scholars over whether 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 it can be argued either that insider trading does not cause anyone to suffer an actual "loss" or that anyone who suffers a loss is not owed an actual legal duty by the insiders in question.^[6] Opponents of political insider trading also point to conflicts of interest and social distrust.^[7]