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Insider Trading the Theory of Knowledge way!

Updated on June 28, 2013

Insider Trading! Good or Bad?

Recently Switzerland’s Central Bank’s chief Philipp Hildebrand was accused of engaging in profitable foreign currency deals and had to resign. The Swiss weekly newspaper Die Weltwoche stated that to say that Hildebrand’s wife was responsible for the foreign exchange transactions were misplaced and it was the bank chief who was behind the purchase and selling of currency. It triggered an investigation by the Swiss National Bank. The incident was labeled as Insider Trading and the bank chief decided to maintain his dignity and gave up his job. This episode made us wonder as to why using exclusive or insider knowledge is considered wrong. We found out that in many of the developed markets insider trading is a punishable criminal offense. In this context, we reached our Knowledge Issue; “To what extent is exploiting exclusive or insider knowledge justifiable.”

In our opinion, we think that it is wrong for people to use insider information. That would give them an upper hand while buying shares, bonds, foreign currency or any marketable security. Use of insider information will result in benefits to such people at the cost of others who do not have access to such information. Regardless of whether such behavior is a criminal offense or not, we find that this is unfair to others and against our moral codes. We will relate our Knowledge Issue to areas of knowledge, such as ethics and human science and ways of knowing such as Emotion and Reason.

In terms of Ethics, whichever we look at it insider trading appears ethically indefensible. Most of religious theories consider that all men are born equal and we should not treat anyone unfairly. Given this belief, Insider Trading is unfair to those who do not have access to the same information. If we examine the same from the perspective of self interest, again its wrong. In case we allow ourselves to benefit from insider trading, others would also exploit such information whenever an opportunity arises. And if that point of time, we do not have access to exclusive information our interest would suffer. Trading is important in capitalism, which is a perfect example of ethical self- interest. Universal law theory also tells us that we should treat others as we wish to be treated ourselves. If we engage in insider trading, others will also do the same to us. So no one ultimately benefits. Being ethical is good for the well being of everyone. Utilitarian theory argues that actions are ethical if they are beneficial for everyone. Avoiding insider trading is for the common good. No one benefits at the cost of others by using exclusive or insider information. If we look at insider trading from a “human nature as a source of morality” point of view, it’s still ethically wrong. Basic laws of human nature too dictate that we be fair in our dealings with others. On the other hand, one could argue that “ Duty as a source of morality” demands that parents should give their children the best they can and insider trading might be useful in pursuing such a duty. Some people may try to justify insider trading on grounds of such duty. However, one would always know that this justification is false and one cannot do inside trading to be fair to all.

Insider trading does not stand to reason even from an economic point of view. Capitalism is based on reason. Trading is a core element of any market economy. In no situation, a single person can have access to all the insider information all the time. If he decides to use such information for his benefit on one occasion and thereby profits in an unfair way, the next time someone else with insider knowledge could benefit at his expense. It will become a zero sum game and in the end it would serve no one’s interests. It may even have serious economic implications. A market economy works on principles of demand and supply and consequent price discovery. If such demand or supply is influenced by insider information, the price discovery will not be correct. After some time, people will lose trust in such a market and keep away from investing in those markets. Investments will stop and only a few people with insider knowledge will be left to trade among themselves. The market will rapidly shrink. One could argue that why bother for the market in general when you can benefit by using your insider knowledge. But this approach may succeed only in the short run. After a while, the rest of the market will realize and no one would like to deal with such investors or in a market that is controlled by insider people. The overall economy will suffer and in the end no one benefits.

When we look at insider trading, we get the feeling that we are being robbed and so of course that makes us angry and want to stop that. We live in a society where one of the most regarded principles is equality. So, of course, insider trading makes us feel like we are not equal and that can make us very angry, as we are not equal in information with people performing insider trading. This sanctity of equality or at least theoretical equality makes people very angry when it is not respected and used for their benefit. There is also an emotional response to anybody gaining a lot of money. We often feel that people gaining a lot of money do not really deserve it. We are often against people gaining money and get angry at them even more if the means to gain the money are not totally clear. This is especially true in quite rich and somewhat socialist countries. However, people doing it do not feel bad or don’t have any bad emotions many a time because they feel they are getting richer and helping their families without annoying anybody. They don’t think it is wrong. So our emotions depend on our point of view. Now can our emotions be trusted in determining if insider trading is ethical? Most of the time, our emotions can be trusted because they are the basis to our deontological ethics and so what we feel is wrong is most often unethical or vice-versa. However, emotions are very subjective, making it impossible to make one clear answer.

In conclusion, we can see that on almost all grounds, insider trading is found to be wrong and unjustifiable. In ethics, most ideologies would agree that it is wrong to gain personal benefit from exclusive knowledge, but there is also ‘duty as a source of morality’ which might make it acceptable to use unfair means to provide the best future possible for their family and themselves. However, duty cannot be only to one’s family and all of us know from our ethical compass that what we do only to serve our own interests cannot be ethically right. If we adopt a narrow definition of duty, then we may fail in our duty to uphold the laws of the land and hereby land in trouble. That may ultimately prevent us from discharging our duty to our family as well. Engaging in insider trading may even drain us emotionally as the thought of being caught by the law enforcement agencies could be very negative for our well being. In terms of reason and economic sense, insider trading is senseless. Apart from individual consequences for the insider traders by way of legal action and penalties, it can ruin a market as other investors and traders would prefer to keep away from stock exchanges that condone insider trading. Flow of money to such markets will vanish and overall share prices will come down. So overall, insider trading is neither ethically correct nor supported by reason or economic logic. Even emotionally it can sap our positive energy and reduce our productivity. In the very short run, one could think of insider trading as a tool to make money quickly but the risk of getting caught is high. And if many people do that and no action is taken, all other traders will desert such a market. So neither ethics nor economics, not even our emotional make-up, favours insider trading.


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