Insider Trading From a "Utilitarian" Ethical Point-of-view. Term Paper

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Insider Trading from a "Utilitarian" ethical point-of-view. The paper discusses types of insider trading, the Utilitarian theory of Ethics and the arguments for and against insider trading.

Ethics of Insider Trading

Insider Trading generally refers to the buying or selling of financial instruments (usually in the stock market) on the basis of privileged information that is known to a restricted group of people. Debate has raged among economists, traders, businesspersons, philosophers and even the general public for many years about the rights and wrongs of insider trading practice. No consensus seems to have emerged yet. In this paper we would be looking at the practice of insider trading from the utilitarian ethical point-of-view and try to determine whether the practice is morally justified.

What is Insider Trading?

Before we discuss the ethics of insider trading, let us see what term "insider trading" really means in greater detail. According to the U.S. Securities and Exchange Commission (SEC), insider trading can be of two types: the legal variety, in which the corporate insiders, i.e., the directors, officers, and employees buy and sell stocks in their own company and inform the SEC of the trades within a specified time; and the illegal type of insider trading in which person(s) indulge in buying or selling of securities in breach of a relationship of trust and confidence, while in possession of material non-public information about the security.

Such illegal trading includes "tipping" of inside information to friends, associates, brokerage firms etc.

Utilitarianism

Having determined what insider trading consists of, a brief review of the Utilitarianism or the Utilitarian theory of ethics would be in order, so that we could move on to view the practice from a specific ethical perspective. Utilitarianism is part of "normative ethics" developed mainly in the late 18th century and 19th century by the English philosophers, Jeremy Benthom and John Stuart Mill. In brief, the Utility theory is that any act may be considered wrong or right depending on whether it produces happiness, not only for the person who performs the act but also for everyone affected by it.

The theory is, thus, different from the "egoist" ethical theory that is concerned only with self-interest or ethical theories that are concerned with the rights or wrongs of an action, independent of consequences.

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It is also differs from other ethical theories that dwell on the motives of the person performing the act; in Utilitarianism it is possible to do right even through bad motives.

In Defense of Insider Trading

Hence, the ethics of insider trading from a Utilitarian point-of-view would only be a question of whether the act increases or decreases the happiness of the people who practice it, and those who are affected by the practice. Apart from the insider who is indulging in insider trading, the persons who are most affected (or likely to be affected) by such practice are the shareholders. If we look at the issue from a wider perspective the affect would be on the "market" as a whole and all the players who are involved in the market. This is where the issue of determining whether the act of insider trading is good or bad becomes complex. One of the players (the insider) would almost certainly become happy by making a quick profit. (Although this is not 100% certain, as having insider knowledge still does not guarantee profit -- there are other factors in play in a market that may punish a rash move by the insider.) Whether insider trading would diminish the happiness of the other players by adversely affecting the market is a controversial issue. Some economists are of the view that an unregulated free market operates automatically and impersonally like planets in a solar system.….....

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