Insider trading is the basing of stock trades in a public company on information that is not known by the public (Rasmussen, 2009). Whether an individual makes trades in this manner or just tips off another trader to the information, it is considered insider trading (Rasmussen, 2009). Insider trading is illegal because it "destroys [the] level playing field" that allows all investors to make decisions based on the same information (Rasmussen, 2009). However, under some conditions insider trading is legal, as when a company's corporate insiders buy and sell their own company's stock and report their trades to the U.S. Securities and Exchange Commission, the SEC (Rasmussen, 2009). This approach is legal because the insider trading is done out in the open where anyone can learn the corporate insider's opinion of his company (Rasmussen, 2009).
This paper will examine the practice of insider trading asserting that it should be legalized. It will also explain how it relates to and affects the economy.
Utilitarian ethics judges actions by their outcomes, and from this perspective, "buyers are no worse off as a result of having purchased from an insider than they would have been if they had purchased from a noninsider" (McGee, 2008, p. 59). From this theoretical perspective, at least, there is therefore nothing wrong with insider trading.
The level playing field argument that is often applied to insider trading argues that "all investors should have the same information at the same time, regardless of what they have done, if anything, to earn the information" (McGee, 2004, p. 4). The problem with this argument, as McGee (2004, p. 4) points out, is that while it makes sense to have a level playing field in sports, "it is not possible or desirable to ever have a level playing field in the realm of economics." McGee (2004, p. 4) contends that while "it would not be fair for one football team to have...