What ethical conflict does insider trading present?

Insider trading is not a victimless crime. It brings benefits to the few at the expense of the many.

What is it?

Insider trading occurs when an individual uses market-moving information not yet available to the public in the act of buying or selling a financial asset.

Insider trading usually involves trading stocks of individual companies based on information about them, however it, can involve any kind of information regarding the economy, a commodity or anything that moves markets in general.

It can be committed by an insider, such as a company executive, or an outsider who gets information from an insider.

Research has shown time and time again that insider trading is common and profitable, and can be difficult to prove, as well as prevent. A 2020 study estimated that only about 15% of insider trading is actually detected and then prosecuted.

The aftermath-

Insider trading has many negative and unethical impacts on a range of stakeholders. The effect on public confidence in the market is a very significant one.

Damaged Public Confidence

Insider trading most certainly puts the average investor at a major disadvantage. Why should only a small amount of market investors be provided with information that many more could benefit from?

Insider trading can reduce ordinary investors’ confidence in financial markets and give them a sense that the odds are in favour of the privileged and against them. How can they make any money in stocks if they are consistently being put at a disadvantage by unethical insiders?

Also, since inside traders’ gain profit from their privileged access to information, rather than working for it, this makes people believe that the system is severely rigged and corrupt. If the nonprofessional investor feels that they cannot participate in the markets without getting ripped off, they may also leave the markets.

Curbing insider trading-

Implement educational training courses

Boards and management need to champion an approach of zero tolerance to insider trading. They need to ensure that staff are aware of what information can be used in  illegal trading through implementing educational training courses about insider trading into their company programs.

This is one of the best ways to ensure that employees understand this practice and how harmful it is. If insiders are unaware of ´insider trading’, they may end up partaking in it without even knowing that it is illegal.

Establish a blackout period

You can also try to prevent insider trading by using a ‘blackout period’ before a quarter ends. A blackout period is a company policy that prevents insiders from buying or selling a company’s securities during a specific period of time and if any employee trades during this time, they can be fired from the company and face significant consequences like hefty fines and jail time!

Implement a pre-clearance procedure

Finally, imposing a rule that all insiders must inform the Chief Accounting Officer before trading in the company’s shares means that any securities’ purchase must go through an authorised officer first. A pre-clearance procedure like such will ensure that an employee cannot trade unless they have permission to do so.

GRC Solutions offers an insider training course