What is Insider Trading?

In today’s division-of-labor society, it is inevitable that some individuals will discover and act on information before (and better than) others do. Such differences are the consequence of the fact that the human mind is individual by nature. Just as there’s no such thing as a “collective mind,” there is no such thing as “collective information.”

To grasp information an individual must expend effort; he must either create the information or discover it. After he does this, he may well choose to trade it with others or give it away in some act of charity (just as he may do with his tangible assets). However, he should not be obligated (nor compelled by law) to do these things. Morally, he does not “owe” his knowledge to anyone. The primary moral obligation rests on others: they should be obliged to keep their hands off such assets and not destroy or steal them (or hire the government to do so).

Contrary to the dogma preached by the SEC, “inside” information does not “belong” to the “public” — or to the government. If that were the case, we would have public ownership of the means of production (socialism) — because in today’s “information economy,” information is a crucial means to production.

“Inside” information about any company — its trade secrets, strategies — are assets that belong to shareholders (and to shareholding-executives too, if other shareholders approve of such a policy). Only a firm’s owners have the moral right to decide how their employees can use such information. Government-bureaucrats should have no say in the matter as no fraud is involved—and as long as a firm discloses its insider-information policy, no fraud is involved.

Under the principles of agency law, firms may use “inside” information as employee compensation; or the company through its bylaws can restrict its use (only then can “insider trading” be punished by owners as a breach of a contractual obligation). In a free-market, investors choose the kinds of companies they want to invest in (rather than have the SEC choose for them): a company which allows insider trading, or a company that prohibits it, or a company somewhere in-between.

 

At the root of the claim that the creators of knowledge and wealth owe it to the non-creators is the anti-American, ethical code of altruism — of allegedly-noble self-sacrifice. In Marxist terms, this means that wealth and information must be plundered “from each according to his ability” and distributed “to each according to his needs.” The producer has the ability, i.e., “greed”—the “public” has a need—the inalienable rights of the producer be damned.

“Insider trading” is a victimless crime. It is an innocent act that should be legal. However, worse than being a victimless crime, “insider trading” is a crime that has never been defined in law. (1) Thus, even though “it” is illegal, there is no real way to know if one has engaged in “it.” This permits regulators to persecute whomever they wish – at any time – for whatever reason they choose. To face jail time for an undefined crime is characteristic of a dictatorship – not a free society.

There are legitimate laws against securities fraud – but, “insider” trading is not fraud. The government should prosecute fraud, but only by an objective, legal process in a court of law—and not an arbitrary, back-room regulatory process by a “rule of politicians.” The legal burden should be on the government — or the allegedly aggrieved party—to prove that a drug is dangerous and that its distribution would violate the rights of others.

(1) “Section 10 of the Securities Exchange Act of 1934 broadly outlawed stock fraud. Eight years later the SEC adopted Rule 10b-5, making the fraud provisions applicable to purchases as well as sales of securities. Section 10 and Rule 10b-5 became crucial to the prosecution of illegal insider trading. Neither defines it, however.” (“Whispers Inside; Thunder Outside: A New Hunt Is On For Insider Trading,” The New York Times, June 30, 2002, Section 3, pp. 1&14;).