A debate rages on in the financial community among professionals and academics as to whether insider trading is good or bad for financial markets. Insider trading refers to the purchase or sale of securities by someone with information that’s material and not in the public realm.
Some economists have argued that insider trading should be allowed and could, in fact, benefit markets. In fact, insider purchases of stock are often seen as positive signals by the market as it’s assumed the insiders know more than anyone else. Also that Insider trading is actually an active good. As Markets work best when goods are priced accurately, this in the context of stocks means that firms’ stock prices should accurately reflect their strengths and weaknesses.
One argument against insider trading is that if a select few people trade on non-public information, the integrity of the markets will be damaged. And investors will be discouraged from partaking in them. Insiders with non-public information will be able to avoid losses and benefit from gains. This effectively eliminates the inherent risk that investors without the undisclosed information take on by investing in the markets.
If those investors in the dark begin to withdraw from the markets, there would be no other investors for those partaking in insider trading to sell to or buy from. And insider trading would effectively eliminate itself.
Another argument against insider trading is that it robs the investors who don’t have non-public information of receiving the full value for their securities. If non-public information became widely known before an insider trading situation took place, the markets would integrate that information and the securities in question would become more accurately priced as a result.