tradingplacesFor most of my life, much of what I’ve learned about the world came from watching movies. This was especially true in 1983, when I was in junior high. That was the year I learned about astronauts (The Right Stuff), thermonuclear war (War Games), and ewoks (Return of the Jedi). I also learned about financial crimes—specifically insider trading— from the Eddie Murphy/Dan Akroyd comedy, Trading Places.

If you’ve forgotten the plot, here’s a brief summary by Gary Gensler, the former Chairperson of the Commodity Futures Trading Commission. In testimony before Congress, Gensler said,

In the movie “Trading Places,” starring Eddie Murphy, the Duke brothers intended to profit from trades in frozen concentrated orange juice futures contracts using an illicitly obtained and not yet public Department of Agriculture orange crop report. Characters played by Eddie Murphy and Dan Aykroyd intercept the misappropriated report and trade on it to profit and ruin the Duke brothers. In real life, using such misappropriated government information actually is not illegal under our statute. To protect our markets, we have recommended what we call the “Eddie Murphy” rule to ban insider trading using nonpublic information misappropriated from a government source.

Turns out I wasn’t wasting my time on a silly comedy—I was learning about a future commodities regulation.

Yet aside from the “Eddie Murphy” rule, I don’t actually know that much about insider trading. I also hadn’t given it much thought since watching Gordon Gekko get rich off inside information in Wall Street (1987). But this week I listened to an intriguing Planet Money podcast about the topic. The show’s hosts, David Kestenbaum and Jacob Goldstein, ask a question that I hadn’t considered before: What makes insider trading wrong?

Let’s first define what we mean by the term. As the Securities and Exchange Commission explains,

Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include “tipping” such information, securities trading by the person “tipped,” and securities trading by those who misappropriate such information.

The assumption it that insider trading is not a victimless crime. “Somebody was definitely harmed,” says Kestenbaum. “It’s just really hard to know who.”

When someone profits by buying stock on an insider tip, says Goldstein, they bought stock someone else could have owned:

That somebody – that unknowable somebody – would have profited when the stock went up. That unknowable somebody, that is the victim. That is the person who got robbed.

I’m not sure I agree. That “unknowable somebody” seems far too vague to be identified as a true victim. So who, if anyone is harmed? And if no one is harmed, what makes it immoral? Or is it even immoral at all?

Some would argue, as Kestenbaum says, that the reason insider trading is illegal is that it amounts to stealing information from a company. If it is indeed akin to theft, then it would clearly be immoral. But is it theft? Sometimes or always? And if it’s not theft, is there still a basis for it to be considered immoral? Those are the questions I want to open up for discussion in the comments section.

Let me add one clarification: I’m more interested in the question of whether, when viewed from the standpoint of Christian ethics, insider trading is immoral. I’m less interested in the questions of legality. As my libertarian friends often remind me, not everything that is immoral should be illegal. Similarly, not everything that is illegal is inherently immoral.

So what do you think? What makes insider trading wrong?

The Virtues of Capitalism: A Moral Case for Free Markets

The Virtues of Capitalism: A Moral Case for Free Markets

In this timely and balanced book, Austin Hill and Scott Rae agree with capitalism's critics that the economy is essentially a moral issue, but they argue that free markets are by-and-large the solution to financial disasters rather than the cause. 


  • sullinsea

    It’s not theft. It’s more like a tort. As the SEC definition states, the perp is in a fiduciary relationship with the shareholders of the company – an officer, director, employer granted access to nonpublic information. The harm resulting from the fiduciary’s breach of duty falls upon the market. When the market is distorted by a fiduciary exploiting knowledge that must be disclosed by the company to the pubkic if it is to be traded upon the shareholders are harmed because the market for the company’s stock loses public confidence.

  • Philosophical Actuary

    Justice in exchange is defined by the equality of the terms or property exchanged, that is the value of what is sold is equal to the value of what is given to buy. The market price is generally the just price and is determined by common estimation of the participants in the market, a common estimation based upon available information. In insider trading, there is an asymmetry in the distribution of information such that someone has information the rest of the market does not. The market price is then not reflective of the just price due to this lack of information. This is seen in that once the information is made public the market price is corrected.
    The additional information that the insider trader has gives him knowledge of the just price which differs from the market price. This allows him to trade at the market price while knowing the difference. This difference of value in the exchange is unjust. The injustice of insider trading is a matter of the act itself rather than someone somewhere being harmed.

    • Joe Carter

      ***The injustice of insider trading is a matter of the act itself rather than someone somewhere being harmed.***

      That’s a really good point. Also, I hadn’t thought about the distinction between market and just prices. I think that is a great way to think about the issue.

  • Joe Carter

    That distinction between hard and soft information is helpful.

    • James McClain

      Just for clarity, I’m thinking of something like the Kraft-Heinz merger this past year as an example. Those who negotiate such deals have information before anyone else; are they in possession of the “soft” information to which you are referring, with the subsequent release of that info to the public as “hard”? Other examples? Appreciate your posing this question.

      • http://michaelbrennen.com Michael Brennen

        James, your question highlights the difficulty of identifying hard and soft information. The core of the distinction is the asymmetry of knowledge in any given situation. As I see it, hard information is any information that would, with a reasonable degree of certainty, materially affect the price of the good in question were all transacting parties able to evaluate it. Trying to identify what might and might not affect the price prior to an actual transaction may have some uncertainty, but in general I think experienced agents would have a good idea how to distinguish the two.

        With your example of the merger, in the negotiation phase there are no hard data on results, but I think it would be hard information in the sense that were the knowledge public that negotiations were happening it would affect the stock prices of the two companies on anticipation of a value change.

        Comments welcome.

  • M Anonymous

    Insider trading is wrong in that it dislocates pricing and efficiencies in the whole free market for the benefit of those using insider information for personal gain, whether they think they are Robin Hood or Gordon Gecko. In other words, it makes the market unfair and less free to all participants and in turn all participants in the economy that markets impact. If you think you are Robin Hood in using insider information, you have only traded place and become another Gordon Gecko. That is the difference between equality and fairness. The only right thing to do with insider information is not to use it for personal gain or to make it public.