Ethics is a discipline that explores the values and validity of actions. Ethical principles determine one’s response to challenges in their daily engagements. Ethics forms an intrinsic part of every organizational structure. The majority of the organizations engage a specific ethical component. Insider trading remains a pervasive phenomenon since the inception of the Securities market. Cases which involve the concept have been on the rise in recent times. Insider trading refers to the buying and selling of stock in the knowledge of information that is not in the public domain.[Click Essay Writer to order your essay]
According to the U.S. Securities and Exchange Commission (SEC), insider trading is the “legal or illegal buying or selling a security, in breach of fiduciary duty, or other relationship of trust and confidence, while in possession of material, non-public information about thesecurity” (Hersh & Statman, 1993). It occurs when an individual employs the information they have of the companies they engage, and which has not yet been released to the public, to sell and buy stocks to gain economically from the initiative. Insider trading is both legal and illegal. It is legal in instances when an individual, through their company, conducts the buying and selling of securities after they have informed the SEC. Regardless, many brokers do not engage these bureaucracies and instead, overlook the need to inform the SEC of their initiatives. This constitutes illegal insider trading. [Need an essay writing service? Find help here.]
Illegal insider trading is an ethically contentious issue. Conflicts of interest underlie insider trading. Essentially, should one wait until the information is shared to trade in the securities? Or should one employ the knowledge they have to reap benefits from the initiatives. Insider trading comprises an ethical dilemma. It inspires a myriad ethical issues. The ethical implications of inside trading range across different categories.
Unfairness and Injustice to Investors
The stock market is a level playground where everyone has the potential to win. It is based on speculation which ensures that no individual has an unfair advantage over the other. The securities market promotes openness, equality, and fairness. In complete disregard of this principle, insider trading is a negation of these assertions. When one acquires knowledge that can be used to gain an advantage over another in a competitive environment, they curtail the potentials of the other players in the market to equally benefit from their risk-taking. In the securities market, information comprises the most significant factor. Every decision that is made in the stock market is weighed against information. Statman and Shefrin (1993) prevail that fairness in financial markets only manifests itself when “all parties have equal access to information which is relevant to asset valuation, but they are entitled to nothing more” (Hersh & Statman, 1993). This is a reinforcement of the prevailing unfairness in insider trading. Fairness is only promoted when every individual is given equal opportunity to benefit from their initiatives.
Alternatively, the fiduciary duty alludes to the need for the release of any insider information that has the power to influence the performance of the subject company in the Securities market. This is a promotion of equality in risks suffered in the financial markets. Every person has to bear a significant amount of risk while transacting in the Securities market. It is this factor that encourages diverse individuals to engage in the system. Insider trading impedes distributive justice (Fugazy, 2011). Every person who participates in the financial market is subject to the social contract which advocates for discipline and justice. When one uses inside information to benefit economically from the initiative, they transfer the risk to the next individual. Their advantages lead to the disadvantages of other investors in the financial markets. This constitutes an injustice to the victims of the action. [“Write my essay for me?” Get help here.]
Respect to the Law
Insider trading is a breach of the judiciary laws, which prevail that inside information, should always be released to the public. Individuals inside an organization have the duty to communicate the information they acquire to the investors. Laws are established to protect the interests of the majority in the society. They are an extension of the collective agreement of the stakeholders to whom it addresses. The laws are only effective when they are respected. The continuous flouting of these laws encourages dissent. A regulatory framework is only applicable when it is extended the requisite respect. The cases of insider trading encourage similar events. When it becomes rampant, individuals will be encouraged to completely disregard the law that protects against insider trading (Fugazy, 2011). When a few individuals are allowed to get away with the act, every other person will start soliciting inside information. This causes chaos and leads to stagnation in the securities market.
Employees have the duty to protect the interest of their institutions. Betrayal and theft comprise unethical traits. The employ of inside information to further oneself constitutes an act of theft. Information in an organizational setting should only be used upon authorization by the responsible parties. Every employee has the duty to protect internal information and follow the laid regulatory frameworks in attaining the information. Insider trading involves the use of stolen information. Given that the employee who engages the information is often unauthorized to use the information, the action borders on an act of theft (Boatright, 2010). Furthermore, the users of the information for personal benefits are not always the owners of the information. Therefore, by choosing to use the information that is not theirs for financial gain, they jeopardize the administrative structure of their institutions. Theft comprises an unethical practice. It is wrong for an individual to make use of a resource that does not belong to them. This is only admissible in situations when there is an implicit directive by the owner of the property which allows for the use of their resources.
Violation of the Modern Finance Theory
Insider trading is a breach of the modern finance theory. This theory reinforces the rationality of the investors in the financial markets. The theory assumes that “investors are rational, are risk averse, possess homogeneous expectations regarding future investment returns” (Hersh & Statman, 1993). Insider trading is a negation of this theory because it tampers with the expectations of returns. All investors thrive on the knowledge that all of them reflect equal susceptibility to risks which result from investments. This knowledge encourages participation in the financial markets. An individual who employs inside information to further themselves in the financial markets intentionally and unfairly enhances their profit maximization chances while displacing the risk onto other investors. Such an act may discourage participation in the finance markets. When the victims of the act are forced to repeatedly contend with involuntary risks and suffer losses as a result of this, they will be discouraged from investing their finances in the securities market (Hersh & Statman, 1993). Insider trading has the potential to stagnate the entire market if it is left to thrive.
Insider trading occurs when an individual with an advantageous position uses unauthorized information for self-benefit financially in the securities market. It is an unethical practice which borders on theft. The use of unauthorized materials constitutes an illegality. Likewise, the act promotes the deliberate flouting of fiduciary duties which are intended to ensure equality in the finance markets. There is a need for development of legal frameworks that will curtail the act.
Boatright, J. R. (Ed.). (2010). Finance Ethics: Critical Issues in Theory and Practice. MA: John Wiley & Sons.
Fugazy, D. (2011). Insider Trading. Mergers & Acquisitions: The Dealermaker’s Journal, 46(10), 32-34.
Hersh, S., & Statman, M. (1993). Ethics, Fairness, and Efficiency in Financial Markets. Financial Analysis Journal, 49(6), 21.