When we hear the term “insider trading,” many of us believe it to be negative. Depictions in the news would have us thinking that all insider trading is illegal. However, insider trading can be both legal and not.
The more infamous variety of insider trading has become the subject of many fictional and real-world dramas. In 2004, Martha Stewart served five months in prison for committing insider trading in 2001 by selling her stocks of...
When we hear the term “insider trading,” many of us believe it to be negative. Depictions in the news would have us thinking that all insider trading is illegal. However, insider trading can be both legal and not.
The more infamous variety of insider trading has become the subject of many fictional and real-world dramas. In 2004, Martha Stewart served five months in prison for committing insider trading in 2001 by selling her stocks of ImClone, a biotech company. Two days later, the stock value fell by 16%. This story was particularly shocking given Stewart’s reputation for perfection.
Like Stewart, individuals guilty of illegal insider trading have all taken undisclosed or privileged company information and used it to make a profit. Since this information is generally not public, individuals acting upon it are at an advantage over those who would otherwise trade honestly based upon public disclosures.
Legal insider trading, on the other hand, requires the trader to register their trade with the Securities and Exchange Commission (SEC). These trades must also be prepared in advance. This way, if a trade occurs and there’s a substantial increase or decrease in the volume of a stock, there would be enough supporting evidence from public disclosures, and the time between the trade, to support its legality.
Traders are always looking for ways to stay just above the law when it comes to illegal insider trading. One famous case of forecasting trades occurred in 2015 when a London hedge fund created a system that monitored Twitter postings for global positive or negative sentiment. If the sentiment was positive, they bought or traded. If the sentiment was negative, they anticipated stocks decreasing. While inaccurate, it is just one of the many ways in which traders are attempting to seek advantage in the market.
As for how this can be detrimental to society, you can probably imagine that a great deal of economic power in the hands of a small number of people cannot benefit society as a whole. Just glance back at history, and you can see the impact of individuals cheating the system. On a simpler metaphorical level, what happens when someone cheats at a game of Monopoly or Scrabble? Do you want to play with them any longer? Probably not. Do you knock over the table and throw the pieces in your opponent's face? Maybe sometimes. Now make the game the real world, the opponent a cheating government or social class, and you (the player) working for the above groups. It's a recipe for revolution.
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