You may have been following the recent Insider Trading scandal(s) & the ongoing debates about whether it’s time to legalize the Insider trading. I don’t have any plans to get into that debate, but there is one thing about insider trading that really caught my attention. Is Prohibition of Insider trading really fair?
In layman terms, prohibition of insider trading means – If you are an individual with potential access to non-public information about the company, you are prohibited from buying/selling stocks of that company based on that material non-public information. (NOTE: For simplicity, I am leaving out the type of insider trading that is legal).
Now, I perfectly understand why there are such restrictions on insider trading. But I still think it is UNFAIR. Here is why – Say, I am an insider of a company with significant number of stocks. Based on the material non-public information I have got access to, I can theoretically do either of 3 actions - BUY/SELL/HOLD-from-Sell (i.e., I've otherwise decided to sell, but changed the plans in the light of insider information)
First two (Buy/Sell) options need no further explanation but the third one (HOLD-from-Sell) is a tricky one!
To elaborate - Say, if a person has almost decided to sell his stocks and then suddenly came to know certain very confidential & critical information about the company that, in near future, would contribute to an increase the stock price significantly. He/She can then put plans of selling stock on HOLD based on this insider information & benefit significantly! None of the rules/laws that are present can catch this person in this instance!! It is not even possible to implement any rules/laws to catch this scenario as it is impossible to guess one’s “intentions to sell”.
As a result, we are ending up with a system – where two out of three scenarios are traced and punished, whereas, the third one, with the same implications, is just left free! Does n’t it make the system UNFAIR? I think, it does.
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