The Oxford dictionary defines stock market insider trading as the illegal buying or selling of securities on the basis of information that is unavailable to the public.
With stock market insider trading, stock market transactions are made with knowledge of nonpublic information about corporate activity. In the United States, it has been illegal since 1934. The Securities and Exchange Commission regards it as unfair to investors who are not privy to such information. Several stock market insider trading scandals shook Wall Street in the mid-1980s.
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Insider stock market trading also includes tipping others when you are in possession of nonpublic information. Directors are not the only ones at risk. People such as brokers and even family members can be guilty. Well it may be a definite no-no, but many are guilty of it!
Is Stock Market Insider Trading good? Or bad? Here's some personal comments published on the aftermath of the Martha Stewart case ...
It's a tricky question. On the face of it, Stock Market Insider Trading is a straight out-and-out fraud. An insider has internal information that will - in the insider's opinion - cause the stock price to move. So, she buys or sells ahead of the move, and takes the profits.
This is a straight fraud because it takes money from the shareholder base. The shareholders are poorer because they did not enjoy the benefits of the change in price. Of course, this assumes that an insider cannot also be a shareholder, and therein lies the conflict of interest: an insider has a fiduciary duty to shareholders, which may be breached if acting on the basis of own shareholdings.
However, the real issue that is at the heart of this insider stock market trading fraud is that, economically, it's pretty nigh on impossible to detect and prosecute. In practical terms, the information is a) in the heads of the stock market insiders, b) subject to misinformation constraints as much as any market noise, and c) hard to determine as being "inside" or "outside" some magic circle.
Thus in purely transaction cost terms, making Insider Stock Market Trading illegal is a very difficult sell. It's a bit like the Music intellectual property debate: songs became property when records were invented, because it was now possible to control their sales by following the shellac and the pianola rolls and sheet music. Of course it took a few decades for this to shake out.
Songs lost their property characteristics with the invention of the personal MP3 player, and we are into the first decade of shaking out right now.... .
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