Insider Trading and Transnational Crime
As the paper is to analyse the extent of wrong and crime in insider trading, it is important to mention the way stock markets work in a brief manner before discussing the pros and cons of insider trading. Normally, the stock market has the shares that are issued and traded through exchanges. The shares traded over the counter also come under the ambit of the share market. Hence, it provides the companies listed in various exchanges with access to capital as well as investors. It offers the investors a slice of ownership of the company as the shares purchased by them are the part of the ownership. In this context, the market can be split into two important sections according to the understanding of the investors. The first one is primary market and the second one is secondary market. The primary market contains new issues from the companies which are first to offer and the subsequent trading of them will be done in the secondary market. Hence, in primary market, the shares are allotted to the investors depending on the order of applying as well as the volume of the invested amount. In secondary market, the shares are traded according to the dividends offered by companies and the security the share can offer for the investment of the investors. Hence, in the context of the above aspect, the value of the shares may rise and fall according to the demand for them in the secondary market. When the value of share of a particular company rises above expectations and even above its real value, the investors can gain by selling them. However, the important aspect in this context is to provide all the information about the shares to all investors to enable them to decide accordingly. However, in the above context, there exists the danger of insider trading, which can be done by concealing information to all the investors or by the owners or issuers acting swiftly to buy or sell them before the information reaches the common investors.
Role of Insider Information
In the context of insider information, it is relevant to discuss the disclosure of information by banks, where the asymmetries are present even after the disclosure. For example, a depositor who wants to deposit an amount in the bank should know about the security status of the bank. In the above context, the details that are related to the borrowings of the banks to borrower and the rate of interest charged are necessary for the investor. In the absence of that information, there is a chance of depositor being exploited. Similarly stock market investors as well as security analysts have much more information than depositors. This is because the investors collect information from the borrowers and are able to know about the current financial condition of the bank, hence, more chance to calculate about the bank failures. In this context, the article Is the information produced in the stock market useful for depositors explains the regional banks and Shinkin banks in Japan, which issue publicly traded stocks and nonprofit cooperatives. In this context, there exist asymmetries in Shinkin banks when compared to regional banks and the stock prices of regional banks will be useful to depositors to decide on Shinkin banks.
In this context, the benefits of insider trading arise and the investors of not having access to that come to the fore. In the first step, it is important to consider the contribution of insider trading to share prices. However, the crowding out of information to outside investors and thus limiting the gains available to them is against the equality and transparency principles underlined in the law, hence, deterring others from obtaining information benefits of the few persons who have the information and not disclosing it to others though they are actually supposed to do so. This is an information asymmetry. In addition, that the lack of information about a particular share may result in adverse selection problems for common investors, which is a result of inefficient corporate behaviour that is implemented intentionally. In this context, Insider Trading Laws and Stock Price Informativeness gives examples of stock prices being more informative after the enforcement of insider trading laws. In the above context, the authors explain that different types of informed market participants are capable of making different contributions.
Impact of Insider Trading
In the above context, it is important to discuss the impact of insider trading to decide its authenticity and reliability for a transparent trade and how it can be considered as fraud or crime. In the era of globalisation, if insider trading is a crime, it can be considered as transnational crime, which is the concept of this paper regarding insider trading. In the above context and
aspect, the article An Economist s Perspective on the Insider Trading Debate and its Impact
states that insider trading is the most recognisable and publicly known form of securities fraud. Though there are enough regulations to prohibit it, the absence of consensus is capable of weakening the case. The important point is that there is no rationale in law makers and administrations to prohibit the insider trading and that fact is just regulating the insider trading instead of prohibiting it openly. In the above context, Alexandre Padilla quotes popularity for prohibiting insider trading as United States Attorney in Manhattan Rudolph W. Giuliani got elected Mayor of New York later in career because he punished the white collar criminals mainly the people like Milken and Levine who resorted to insider trading.
In addition to the popularity for the attempts or actions to punish the people who resort to insider trading, the moral principle that all the investors should have equal opportunity regarding access to knowledge that decides the buying and selling of securities is important. Allowing insider trading is curbing the chances of lots of investors for the sake of few people who have access to information that is concealed intentionally instead of making it public, though it has to be done so. In addition to that, the article Why to Commit The Crime From a Legal and Psychological Perspective explains that insider trading is a crime that results in the wealthy getting wealthier and others not getting that chance and yet at times may face loss also due to insider trading activities. This amounts to cheating and greed that are difficult to deter, though they harm the profit of investors who do not give information regarding decisions on buying shares. Regarding the above aspect, we can find further explanation in insider trading with criminal causation theories. In this context, according to the opinion of the author of above mentioned article, insider trading is a crime limited to a particular kind of criminal but is not open to all the others. The criminal in the above perception is the one who has achieved financial and social success and comes under the ambit of rational choice causation model. Hence, in this context, the rational choice theory states that the criminal is violating social norms and is having psychological advantage than the investors who do not have access to the information.
Wrong in Insider Trading
Hence, in the context of insider trading, equal choice and transparency are important to avoid violating the rational choice offer for all the investors. In this context, we can find an answer in What s wrong with insider dealing about the insider trading that endangers the development of fair and orderly trade in the security markets. It is capable of weakening the confidence of investors thus having a long-term negative effect on the market as well as on the industry. Moreover, the after affects of insider trading that reduce the allocation capacity of financial markets and decrease its liquidity will be a cause for increasing the cost of capital. The last effect of increasing the capital hampers the growth of security market as well as all the industries that are sources for the security and stock market. Hence, insider trading is the one that does not gives sustainable effects for the market as well as the industry, which affects the benefits of investors base that is not acceptable for any business.
Necessity of Prohibition
In addition to the above perceptions regarding insider trading, the legal arguments are there that converge to the view that insider trading should be banned by considering the insider information as the property of a corporation. In this context, we can resort to findings of article Should Insider Trading be Prohibited when Share Repurchases are Allowed . It states that insider traders misappropriate the corporate property without having sole rights on them. Hence, the criminal nature in the insider trading can be understood when the information is termed as a corporate asset that is used by the firm. We can find another reason also to ban insider trading. The adverse selection of losses caused to investors in stock market due to firm s interim choice will exceed improvements on firm due to insider trading and that results in future lack of demand for the shares of the company. In addition to that, the lack of ban on insider trading will benefit only long-term share holders who have access to insider information, and new investors or the investors who invest on a short-term basis may face losses due to lack of information. Hence, if the insider trading has to be restricted, it is important to have laws and regulations that make compulsory divulging of information in a particular form and within a stipulated time. The form in which information is released should be accessible to all the investors and the time it is released should be decided in such a manner that it is not possible to resort to insider trading.
In addition to that, it is important to consider the victims and violators of laws that ban insider trading as stock trading is buying or selling publicly traded shares based on information. Hence, considering the above context, the insider trading can be considered as a crime. In this context, the question of victim in the acting of stock market insider trading comes to the fore as the opponents of laws banning the insider trading argue that there are no victims for insider trading and thus needs no ban. There is enough information about this in Stock Market Insider Trading Victims, Violators and Remedies-Including an Analogy to Fraud in the Sale of a Used Car with a Generic Defect . The information in this article states that it is important to reveal or disclose the victims. In the context of insider trading, the specific victims can be shown as the persons who can perform better in the absence of insider trading. According to above discussion, we can understand that when we focus on the outstanding shares after insider purchase of stock, it is clear that the insider has more of that issue at public disclosure. As a result, someone outside is worse off due to the insider trade and can be considered as victim. Moreover, the worse is more when the transactions of the victims are induced by insider trade.
Legal Arguments
In the context mentioned above, the legal arguments for a ban on insider trading congregate to the point that inside information can be considered as a property of corporation. As a result, the insider trading is a theft as it uses the information supposed for all the share holders or stake holders with some people resorting to insider trading. In addition to that, the view regarding inside information as a corporate asset is important, but it cannot be supported as the corporate companies have a number of shareholders and stakeholders when they are listed in stock exchanges and the information can be only considered as the asset of all the investors to whom the market is open and not an asset of a corporation who wants to do insider trading without disclosing that information. Here, one can bring forth the point of listing the companies in stock exchange for trading its shares. After listing the shares in the stock exchange, the company is inviting the investments of all the investors depending on the demand of their share. When the company is making open its shares to all the investors to attract investments, it is its moral responsibility to share the companys specific information that is generated by the market conditions with all the investors.
When listing the company and sharing information comes to the fore, Insider Trading and Stock Market Thirty Years Later finds Henry Manne s argument that the enhancement of price by insider trading compensates the insiders as well as the issuer s stock price. However, the above argument can be nullified by the fact that when the insiders who trade without sharing the information and taking credit for the enhancement of the price, the question about their responsibility regarding the assurance for the price of share that it will not fall will arise. Without assurance that can avoid the fall of share, the question of taking the credit for enhancing the share price cannot be considered as reasonable and that it cannot support the aspect of insider trading. Regarding the above aspect, it is important to consider that the property rights are protected by default rules rather than by immutable rules. In addition to that, we have to consider price sensitive investors who bear the cost of allowing insiders to trade with an informational advantage. However, as this argument cannot prove that all the investors are capable of bearing the cost, it does not show enough logic or legal support to allow insider trading.
Disclosure of Information
After a substantial discussion over the pros and cons of insider trading, it is important to consider the importance of disclosure of information and then argue on insider trading. In this context, the article Voluntary and compulsory information disclosed online finds resort in signalling theory that considers the disclosure of information as a signal to capital markets. It has the capacity of decreasing the asymmetry of information available, or lack of disclosure of information results in asymmetry of information as investors will be in a state of confusion as to why some shares behave differently in circumstances. Hence, according to signal theory or the effect of disclosure of information on capital markets, insider trading is capable of confusing investors and may lead them to buying a lottery by buying shares instead of doing business. In other words, one can state that the lack of disclosure of information that is the essence of insider trading makes the investments of all the other ignorant investors equal to buying a lottery as they do not have information to decide on which share they can invest.
As part of the disclosure of information, it is important to examine the association of abnormal accruals in the wealth of executives of a company which changes with the stock price. In this context, we can find enough information about equity compensation that is designed to align executive and shareholder incentives in Sensitivity or Executive Wealth to Stock Price, Corporate Governance and Earnings Management . By giving the executives partnership in the firm in the form of shares, it can be termed as insider trading if that information is not revealed to all the investors or if they are not able to access that information on public platforms. The above aspect finds ground in the argument that the allotment of shares to executives may result in increase of demand for the shares and thus the price may enhance. Hence, the revealing of information may help the investors to decide accordingly and thus in many cases, the revealing of information regarding shares helps investors to decide on buying and selling shares in different firms. Hence, it is important to assess the extent of the criminal nature of insider trading by linking its effects with stock-based compensation. As a result, it is important to reveal the extent of shares held by CEOs and other executives of the company as the investors can think about the activities of earnings management of CEOs while buying the shares of that particular company.
The next stage about the disclosure of information is about public announcements and investigating whether the information that prompts the insiders to insider trading should be publicly announced. Earlier in the discussion, the opinion that considers the information as the asset of all the investors but not only of the corporation has been expressed and supported with argument. According to that argument, the contribution of public announcements is enough to have an effect on stock exchanges in the form of market impact. In this context, the article Public Announcement Induced Market Reactions on Baltic Stock Exchanges explains the understanding of market reactions to different news. The opinion of Laidroo is that the information is important for investors to value the market and lack of its announcement may result in wrongly valuing it. In the above context, the duty of market regulators to regulate insider activities arises and the regulation are possible. By making a public announcement of all the information that helps the investors to value the market is important. Laidroo found that the empirical tests of capital market efficiency are accurate with the market-based accounting research. As it is clear that the lack of disclosure of information by corporate entities for the sake of insider trading may affect the accounting research of market, the announcement of information is necessary to avoid insider trading as well as to enable the market-based accounting research in stock market.
Consequences After Revealing Insider Information
After a detailed discussion, it is important to consider the abnormal consequences of insider trading. They are explained in article Abnormal Performances after the Release of Insiders Relevant Transactions . According to the argument in the article, the insider people trade for myriad reasons as they possess private information and it is important to understand that it is an exploitation of information as a difference exists between the administration of the company and the outside investors. The information asymmetry comes to the fore in the context of listed companies as they benefit and increase their share value according to the demand in the market, but cannot enhance the value with the insider information. The essence of the above argument is that if all listed companies do not reveal information, then it is not possible to trade shares in open market and the essence of the stock market will not exist. Hence, the authors consider the five principal areas for research on insider trading consequences. The first one is about legal matters and the second and third area is about influence of insider trading on stock price and vice versa. The fourth area is related to insider trading regulation and the fifth area is about the role of trading volumes that are correlated with stock price. Hence, in all the above five areas, insider trading is illegal as it is violating the open market rule and can enhance a specific stock price abnormally without the knowledge of the stakeholders of stock market. In the last stage, the correlation between the volume of the shares traded in the market and the price does not match as there is abnormal growth of value of stock price of a specific share. Hence, a regulation or a ban is necessary on insider trading.
Legislation for Regulation
As per the above discussion and analysis, it is important to support the fact of legislation to ban or avoid insider trading. The results of research mentioned in Insider Trading Legislation and Corporate Governance find that the results of implementation of legislation have some implications on insider trading. However, it is important to quote at this junction that instead of bringing a law to avoid insider trading if it is a crime, it is necessary to narrow the definition of insider information so that very little information can be used by insiders and a lot of information should be announced to all investors. The above aspect helps the administrations in checking the information revealed by firms in a timely manner and in that manner they can avoid the contexts that lead to insider trading, which is a much better enforcement of legislation.
Conclusion
As per the discussion and analysis in the paper, it can be understood that insider trading is a transnational crime in the era of globalisation as the investors in various stock exchanges come from different countries. In addition to that, insider trading favours only some insiders who have information that is necessary to reveal but they hide it for enhancing their share value after purchasing it for a lower value. As a result, the investors who are not informed will be at the receiving end and thus lose at the gain of insiders. The important fact that supports the argument that insider trading is a crime is that when the company is listed in a stock exchange, the company s shares use the market conditions to enhance their value. Hence, it is the responsibility of the company to reveal all the information so that the investors can decide about buying or selling the shares of the company. Hence, it is important to tackle the menace of insider trading. The tackling starts by defining the insider. In order to define the insider, we can take support from the article Insider Dealing-Identifying and Tackling it . In this article, we can find the statement of the US Court of Appeals in SEC v Texas Gulf Sulphur Co. According to that, the insider is a person who has direct or indirect access to the information that is intended for personal purposes and not available to people who invest in stock market. Hence, when it is proved that a person bought or sold the securities with the information that is not available to all the investors but which needs to be revealed, then heshe can be considered as the one who resorted to insider trading. Hence, the above mentioned insider trading is contrary to public interest and legislations are necessary to take action against the people just mentioned above. The governments have to prohibit certain activities that are considered as insider trading and if any proof is available, action can be taken according to the prescribed law.
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