Does insider trading harm public confidence in the market?
Gene Marcial, MA, Senior Writer at BusinessWeek, in a June 18, 2002 article "Insider Trading: The Street's Noxious Weed," wrote:
"...Indeed, it could be said that insider trading is the second-oldest
profession. After all, people who have access to inside information and who sell
their integrity for illegal profit are financial prostitutes. They undermine
public trust in one of the basic tenets of capitalism: Maintenance of a level
playing field in the capital markets..."
Thomas Newkirk, LLB, former Associate Director, and Melissa A. Robertson, JD, Senior Counsel, in the Division of Enforcement of the Securities and Exchange Commission (SEC), in their Sep. 19, 1998 speech at the 16th International Symposium on Economic Crime in Cambridge, England, stated:
"...maintaining healthy markets requires investor confidence and acknowledges that investor confidence depends on the 'assurance afforded to investors that they are placed on an equal footing and they will be protected against the improper use of inside information..."
David D. Haddock, JD, Professor of Law & of Economics at Northwestern University, in a 2002 article for The Concise Encyclopedia of Economics titled "Insider Trading," wrote:
"...[I]nsider trading undermines public confidence in the securities
markets. If people fear that insiders will regularly profit at their expense,
they will not be nearly as willing to invest... [C]ompanies prefer that
their securities trade in 'thick' markets - that is, markets with many traders,
substantial capital available, and frequent opportunities to trade at readily
observable prices. Efficient securities markets, it is argued, require a 'level
informational playing field' to avoid frightening away speculators, who
contribute to securities market liquidity, and investors, who could invest their
savings in markets with less risk of insider predation..."
Joerg Hartmann, JD, in a Winter 1997-1998 Gonzaga Journal of International Law article "How Would O'Hagan Come Out Under the New German Securities Trading Act?," wrote:
"...The intuition of investors and their feeling for justice and fairness
should not be underestimated. If investors feel unfairly treated they may lose
confidence in the integrity of the securities market. These investors would then
withdraw from the market and invest in other opportunities. This view clarifies
why concern about the confidence of investors in the integrity of the market was
a motive for the enactment of the insider trading prohibition..."
The Ontario Securities Commission (OSC) in its Insider Trading Task Force report completed in Nov. 2003 and titled "Illegal Insider Trading in Canada: Recommendations on Prevention, Detection and, Deterrence," wrote:
"...Trading on inside information, especially illegal insider
trading, can cause significant harm to the fairness and efficiency of Canadian
capital markets. Even the perception that illegal insider trading is prevalent
can cause harm. This is so because it undermines investor confidence in the
fairness and integrity of capital markets..."
Henry G. Manne, SJD, Dean Emeritus at George Mason University, in a Fall 2005 Journal of Corporation Law article "Insider Trading: Hayek, Virtual Markets, and the Dog That Did Not Bark," wrote:
"...I do not consider the SEC's 'official' line on insider trading, that it destroys the confidence of investors and thus lessens both liquidity and investment, to have serious merit. Apart from being a nearly unfalsifiable proposition, it is devoid of the scantest economic or empirical content. It has, however, been enormously important in the propaganda campaign the SEC has waged for years to demonize insider trading..."
Stephen M. Bainbridge, MS, JD, William D. Warren Professor of Law at the University of California, Los Angeles (UCLA) School of Law, in his 1999 book Securities Law - Insider Trading, wrote:
"...In the absence of a credible investor injury story, it is difficult to
see why insider trading should undermine investor confidence in the integrity of
the securities markets... The loss of confidence argument is further undercut by
the stock market's performance since the insider trading scandals of the mid
1980s... the years since the scandals have been one of the stock market's most
robust periods. One can but conclude that insider trading does not seriously
threaten the confidence of investors in the securities market..."
Stephen Moore, MA, Financial Columnist and Contributing Editor for the National Review Online (NRO), in his Mar. 9, 2004 article, "What's Wrong with Insider Trading? The Railroading of Martha Stewart," wrote:
"...[A]dvocates of insider-trading laws are probably irate at this
proposition of mine to legalize insider trading, because insider trading 'hurts
the mom-and-pop investor.' They also say that we need to enforce this law to
maintain the integrity and the public confidence of the financial markets.
Baloney. The market fell - didn't rise - on the news of Martha Stewart's
conviction. If investors believe that the SEC can throw you in jail for making
trades that can be construed by a federal prosecutor as based on 'insider
information,' this has a chilling effect on the financial markets and all stocks
are hurt. That means all investors are also hurt..."
Roman Tomasic, PhD, SJD, fomer researcher for the Australian Institute of Criminology, in a 1991 institute report titled "Australian Studies in Law, Crime, and Justice: The Effects of Insider Trading," conducted a survey with the following results:
"...Brokers said that insider trading has not undermined confidence in the
...The financial advisors generally said that there had
not been any undermining of confidence... '[O]n the contrary, insider
trading makes people get involved in the market'...
[Australian Securities Exchange] officials also did not think that
insider trading of itself had affected market confidence but that what had been
said about it had done more damage...
...There was a high degree of
unanimity amongst lawyers to the effect that insider trading has not undermined
confidence at all..."