Should insider trading be legal?

The idea that some people are in a position to know more than others can offend our collective sense of fairness, but it doesn't generate all that much outrage.

By MSN Money Partner Jul 31, 2013 1:41PM

Businessman in car with smartphone © Image Source, Image Source, Getty ImagesFox BusinessBy Al Lewis


Imagine a world where insider trading is legal.


As chief executive, you could short your own stock just before reporting your disappointing numbers to Wall Street.


As investor relations or PR counsel, you could trade ahead of any news you may hear in advance as a routine part of your job. So could accountants, attorneys, auditors, consultants and employees -- all the way down to the janitor digging through the office recycle bins.


Hedge funds could deploy armies to sidle up to corporate insiders -- buy them dinners, take them on fabulous trips, shower them with gifts -- just for information.


Stockbrokers and financial planners would never have to worry about going to prison after hearing a hot tip at a cocktail party.


The rules would be well-understood: Whoever gets the best information wins.


"I want the laws completely erased," said John Tamny, editor of Forbes Opinions and RealClearMarket in an email exchange.


"Let the markets sort out the information that's out there."


He argues insider trading is vaguely defined, and to criminalize it merely blocks the flow of information markets need to thrive. He is hardly alone.


"As sleazy as insider trading sounds, there really isn't much of a reason to ban it," Dylan Matthews of the Washington Post's Wonkblog wrote last week.


He argues insider trading laws only create "the illusion of fairness." Small players are convinced they have a fair chance to when in fact they are routinely eaten for lunch by large institutional players.


In an opinion piece for Reuters last week, Bethany McLean makes a similar argument. She takes aim at regulators and prosecutors who boast that their efforts actually ensure the market isn't rigged. Like New York's Attorney General Eric Schneiderman, who declared in a press release last month: "The securities markets should be a level playing field for all investors."


They should be level, but they are not. "Life isn't fair," McClean wrote, "and as we all know now, the playing field hadn't been leveled."


It's just the right slant for the ruling class, though. Members of Congress, whether it's Republican John Boehner or Democrat Nancy Pelosi, often do surprisingly well in the market. Imagine knowing what legislation would be introduced before everyone else and being able to trade on it.


Last year, after TV news magazine "60 Minutes" reported on the trading activities of key members of the House and Senate, Congress passed the "Stop Trading On Congressional Knowledge Act." Then earlier this year, with hardly anyone noticing, lawmakers passed another bill to reverse key provisions of the law.


Perhaps the folks at hedge fund SAP Capital Advisors, who have recently pleaded guilty to insider trading charges, should have run for Congress. Last week, the Securities and Exchange Commission served the firm with a criminal indictment and continues pressing civil charges against its founder Steven Cohen.


The agency hasn't done much about accounting fraud, or other shenanigans that lead to the 2008 financial crisis, but insider trading remains a priority.


Over the past three years, the SEC boasts of filing 168 insider trading cases, more than any three-year period in the agency's history. These actions were filed against nearly 400 individuals and entities with illicit profits or avoided losses totaling about $600 million. But it's likely they still only represent a sliver of the problem, the sliver of people who happened to get caught.


Recent cases have included some of the biggest players on Wall Street, such as former hedge-fund manager Raj Rajaratnam and former Goldman Sachs (GS) board member Rajat Gupta. They've also included many smaller players:

  • A group of Swiss traders trading Heinz ketchup stock.
  • A stock broker who traded Burger King (BKW) shares.
  • A former Major League Baseball player who befriended his neighbor who just happened to be the CEO of a medical-device company.
  • A bunch of high school friends in New Jersey who traded stock of a health-care company where some of them worked.

The number of cases suggests the practice is so widespread that anyone who can't compete with insiders should buy indexes and exchange-traded funds.


So far, arguments to abolish insider trading laws are getting little traction. The idea that some people are in a position to know more than others can offend our collective sense of fairness, but it doesn't generate all that much outrage. Tamny said he's been surprised by the weak response to his columns over the years arguing insider trading should be legal.


"What surprises me," he said, "is how uninterested people are in it."


More from Fox Business

Jul 31, 2013 3:07PM
Yes, let's keep putting up with Congress enriching themselves with insider information legally since they make their own rules, while the rest of us go to jail for it.  That sounds good.

And they wonder why Americans are so fed up with them?!?
Jul 31, 2013 3:03PM
Flat out no.  The problem with insider trading is that it only benefits the few, but can impact the many.  Most people that invest for retirement can, would, and do get screwed when illicit transactions are done. 

The fact that The Boner and Skeletor (Pelosi) do is fairly well known and also one of the many reasons why there needs to be term limits in Congress.  What isn't known as well is how much their position and access to information benefits their inner circle.

Jul 31, 2013 3:13PM

Agreed, life isn't fair.  Why should we make it more unfair by benefitting the few & screwing the rest of us?


Jul 31, 2013 2:59PM

As long as congress can still do it, it must legal.

Jul 31, 2013 3:21PM
NO. In fact corporate officers shouldn't be allowed to own stock.
I don't think so!  The benefits are to the few, and the damage is to the many.  It will instill total distrust of investment markets, if it's not already there.  Who in the hell suggests these lamebrain ideas? 
Jul 31, 2013 3:48PM
you mean it is not  legal.  wow  somebody better tell congress  oh that's  right  they don't  confide in  us they don't work for  us . so they can do anything they  please they make there own  rules  that they don't have to   tell us what they are  doing  . give me a break  of course  they do inside  trading
Jul 31, 2013 3:07PM

Its already legal for Nancy Pelosi.  why not everyone. 

Don't call me a hater until you check the facts.

Jul 31, 2013 2:57PM
I actually thought it was to some extent. And under certain circumstances.
Jul 31, 2013 3:44PM
Just shut down the whole stock market if your going to make insider trading legal.
Jul 31, 2013 3:30PM
The entire market clusterf*** is based on insider trading, isn't it? I mean the plan is to by low and sell high, right? Make a profit!!!!! For you to make money, somebody has to lose money. It is an insidious evil; part of the problem not part of the cure.
Jul 31, 2013 4:25PM

Insider trading  of any sort ; All should be jailed ! IN doing  CONGRESS would in turn have many opening's and empty seats AS many of them would be in JAIL ; ANYWAY .

Even our own has sold us out ; ! The failure starts there.  

Jul 31, 2013 4:05PM

Yes GBOIN, but strange you would "only" bring up Pelosi...Kind of discredits your statement.


gboing, gboing, gboing, gboing, gboing, SPLAT !!!

Jul 31, 2013 3:13PM
Insider trading and information has been going on ever since the first business was started.  It's just the nature of the beast.  I doubt there is a person alive that hasn't told or been told of a great opportunity to get in some kind venture before it was made known to the general public. 
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