Does insider trading harm public confidence in the market?

PRO (yes)

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..."

June 18, 2002 - Gene G. Marcial, MA 

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..."

Sep. 19, 1998 - Melissa A. Robertson, JD 
Thomas C. Newkirk, LLB 

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..."

2002 - David Haddock, PhD 

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..."

Winter 1997-1998 - Joerg Hartmann, JD 

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..."

Nov. 2003 - Ontario Securities Commission (OSC)  

CON (no)

Sheldon Richman, PhD, Senior Fellow at The Future of Freedom Foundation, in a Jan. 14, 2004 article titled "The Fraud of Insider-Trading Law," for the organization's newsletter Freedom Daily, wrote:

"...[T]he assumption that insider trading erodes confidence in markets is false. On the contrary, confidence is increased by the realization that prices reflect up-to-date information...

...Nothing would undermine confidence in markets more than the belief that prices are out of date..."

Jan. 14, 2004 - Sheldon Richman, PhD 

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..."

Fall 2005 - Henry G. Manne, SJD 

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..."

1999 - Stephen M. Bainbridge, MS, JD 

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..."

Mar. 9, 2004 - Stephen Moore, MA 

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 stock market...

...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'...

...The ASX [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..."

1991 - Roman Tomasic, PhD, SJD