Why is Insider Trading Unethical?
There is a multitude of reasons as to why insider trading should remain illegal. Most importantly, insiders have an undeniable advantage; legalizing insider trading would allow them to exploit the market. Average investors would also refrain from investing as they realize they are at a significant disadvantage. Ethically, there are three main pillars that declare why insider trading is wrong: virtue, duty, and utilitarian. These three main pillars of ethics each present a different viewpoint on insider trading and why it should remain illegal.
Virtue ethics is considered an agent-based approach to ethics; focusing on the fundamental character and motivations of the individual moral agent (Patel 2015). Virtue ethics emphasize the role of character and virtue in moral philosophy rather than acting in order to receive a personal gain. This would include an individual to display characteristics of honesty, fairness, and integrity. Consequently, an inside trader could be considered almost the complete opposite of a virtuous person. Insider trading involves much dishonesty, as they disclose information to others while knowing a crime is being committed. Insider trading is also extremely unfair to investors who have not received the same information as they are at a disadvantage. The insiders also reap benefits from this undisclosed information, seeking to profit rather than focus on moral excellence. Insider trading violates almost every characteristic a virtuous person possesses.
Duty ethics is a normal ethical position that judges the morality of an action based on the action’s adherence to a rule. In short, anytime you violate a set of rules, your are violating duty ethics at the same time. As an insider, there are strict rules regarding business transactions and well as certain obligations that must be performed. The Securities Acts of 1933 and 1934 were created with strict regulations in order to prevent insider trading. Taking part in insider trading automatically violates your fiduciary duty to follow the guidelines set regarding such action. If trading was unregulated by the SEC, a financial depression is likely to result as it has happened so many times in the past. These laws were created for a reason and it is considered a moral duty to abide by these standards.
Utilitarian ethics infers that one must take the morally right course of action in any situation that produces the greatest balance of benefits over harms for everyone affected (Andre 2015). When a company’s leadership is given the ability to make a profit while the majority of shareholders lose money their investment, it causes the entire market to suffer. While insiders improve their own personal wealth participating in insider trading, it essentially hurts the market as another level of unpredictability is created. With a high level of unpredictability, investors may be deterred away from the market all together. The investors are not given the opportunity to make a profit from investing and instead are really losing money due to inflation. Companies are also not receiving capital in order to expand, creating a stagnant economy. Fundamentally, if companies are not expanding, investing becomes irrelevant. This just one of many outcomes to insider trading, but such a significant decrease in investing could potentially destroy the marketplace as a whole. If such a scenario were to happen, the losses would outweigh the gains by a sizable amount.
Insider trading is not only illegal, but is morally unjust on multiple levels. For the insider, it is morally wrong to make profits while others are losing capital as a result of your actions. These three ethical evaluations on insider trading emphasize why laws regarding the practice are put into place. These laws bring stability to the market and allow individuals as well as companies to benefit from capital investment.
