Effects Of Insider Trading Regulations On The Capital Markets

Good Essays

The concern of this paper is the effects of insider trading which constitutes whether to support or to reject insider trading regulations. Whether insider trading should or should not be regulated in the capital markets is a difficult question to answer due to ethical and rational concerns. A suitable answer is an answer that must be sufficient enough to satisfy both types of concerns appropriately. This paper contains three sections to this topic: for regulation, against regulation, as well as a personal critique. Due to the nature of this touchy subject, this topic of insider trading regulations has been one of the most controversial debate ongoing for decades by many intellectual authors. Few of these authors’ insights will …show more content…

If not so, then inside-traders would have a significant advantage over outsiders; thus leading to a higher rate of return against the statistical mean. This however is not what pro-non-regulation supports view as practical. Rather than a fair trading ground, they propose that price moving efficiency as significantly more important. Thomas Lambert, an author who defends the idea having regulations against insider trading, proposes a more middle-ground solution that would loosen regulation while maintaining some but not all current regulations. His proposal suggests that the SEC should not regulate price decreasing tactics, whereas to leave price-increasing tactics regulations fixed. In fairness to his proposal, it can be a remedy that would correct over-valued equity prices, while protecting under-valued equity. Not only would it satisfy the intentions of anti-regulation supporters, but it could fix ethical concerns regarding manager behaviors. Now there are many reasons as to why regulations must stay fixed in place against inside trading. It would give way to an unfair advantage to investors holding privileged information.
While possessing undisclosed information, managers would be able to take on risky projects that may have been above their risk tolerance. In other words, insider trading is practically used for two purposes: to maximize gains and to minimize risk. The price of a firm’s stock reflects the valuation

Get Access