Insider trading as an incentive for workers

As well as the economic argument for legalizing insider trading, Marine put forward another argument, which is that insider dealing should be used as an incentive for the personnel of conglomerates (McVea, 1993, p. 51). He believes that since managers and directors contribute to a great extent to the increase of the organization’s wealth, salaries are not adequate to reward them. He therefore believes that they ought to be able to take advantage of the information that they exclusively possess to trade in the company’s shares (ibid.). Otherwise ‘innovation’, which increases profits and is essential to any company’s success, would not be encouraged and therefore the company would be worse off (ibid.). This scheme of rewarding managers and directors, although it will increase their income quite substantially, will not necessarily boost the company’s performance. An insider can make use of both good and bad news. Use can be made of the good news by buying, and of the bad news by selling. Here a manager will benefit from generating bad news to the company by avoiding loss (ibid., p. 52). This means creating a kind of rewarding scheme that is not ‘commensurate with effort’, which should be the basis of any rewarding scheme (ibid.). Furthermore, using trading upon insider dealing as a perk or a scheme of rewarding is extremely unfair. This can be seen when considering that confidential information is provided to an employee as a result of his or her position regardless of his/her contribution to this information. For example, a manager who has been performing very badly is likely to come across price-sensitive information and trade upon it. At the same time, another employee who has been performing extremely well may be unable to access the same information. This means that employees will be rewarded according to their position and regardless of their actual performance. Again and for the above reasons, Marine’s argument cannot justify legalizing insider dealing.

The ‘impossibility’ of effective regulation of insider trading

Finally, the advocates of unregulated insider dealing argue that insider dealing cannot be regulated properly and it is impossible to have effective regulation, thus it should not be regulated. Insider trading is a very complex crime and detecting it can be impossible in some cases. For example, the defendant can claim that they did not know that the information was price-sensitive or they may argue that they would have traded even if they had not known about the information (Cole, 2007). This makes successful prosecution extremely difficult. Margaret Cole (2007), the director of enforcement at the FSA, conceded that prosecuting an insider is extremely challenging. She stated that not only proving the elements of the crime is difficult, but also ‘the practical challenges of presenting complex insider dealing cases to a jury are immense’ (ibid.). However, while Marine sees this obstacle s a justification to legalize insider dealing, Margaret Cole does not. McVea (1993, p. 57) summarized Marine’s argument as ‘anti-insider dealing law is unenforceable; unenforceable law is a bad law; bad law should not be on the statute books’. Then McVea (ibid.) criticized Marine’s argument by stating that ‘partial enforcement’ on undesirable actions such as insider dealing is better than not having any restrictions. McVea’s argument seems to suggest that even if it is impossible to control insider dealing, it is still an immoral activity and regulators should not approve of it by not criminalizing it. Furthermore, despite being a really difficult crime to detect, insider trading can be tackled. This will not be achieved by the capacity to prosecute every insider, rather it may be accomplished through preventing insider trading from occurring. In other words, a proactive approach may well be the remedy to this obstacle.

A proactive approach

The introduction of a proactive approach aims to reduce the occurrence of insider dealing as much as possible. This can be achieved by restricting the flow of information between conglomerate departments. For example, information gained by the marketing division should not be passed on to the investment division. This restriction may have a negative effect on financial conglomerates as it will restrict the liaison between internal departments, but not to the extent that it should be abandoned (McVea, 1993, p. 350). Furthermore, this policy will be effective in terms of reducing insider dealing among financial conglomerates rather than all the quoted companies and individuals involved. This can be complemented by a more holistic approach which is forcing companies listed on the stock market to disclose all information once they gain it. This will eliminate the benefit of trading upon inside information as it will be known to the public immediately. Disclosure and transparency as two rules to which companies have to adhere are already imposed in many markets; however, not efficiently enough to eliminate the occurrence of insider dealing. Margaret Cole (2007), the director of enforcement at the FSA, asserts that the FSA ‘put a significant emphasis’ on proactive policies such as ensuring ‘a steady flow of information’. The FSA in this sense has accomplished encouraging results. Figures show that the level of undesirable activities, including insider dealing, plummeted from 19.6% in 1998-2000 to 2% in 2004-2005 (Cole, 2007). This reduction is clearly the result of the proactive measures. Yet, the figures also show no reduction in illegal activities when it comes to dealing upon information to do with mergers an acquisitions, and this is mainly due to the huge number of people involved in such a process, and therefore the higher likelihood of information leakage (ibid.). However, the FSA is working on coordinating between the different parties in order to overcome this issue. Despite this, the overall reduction shows that the FSA succeeded in preventing a great deal of insider dealing from taking place. This means that a proactive approach can be effective and Marine’s argument in this regard is no longer valid.

Conclusion

In conclusion, a perfect market where no kind of wrongdoing is taking place can be an unrealistic ambition. Nevertheless, market regulators ought to do their utmost in combating all forms of wrongdoing in order to provide the highest possible level of market integrity, which will attract investors from all over the world. Insider dealing as a form of wrongdoing, as previously mentioned, is rather controversial. Many lawyers and economists believe that insider dealing is efficient and beneficial not only for insiders, but also for outsiders. This argument was not compelling enough to persuade major economies such as the USA, UK and Japan to legalize the controversial crime. Rather, those countries and many others opted to fight insider trading and follow the argument that insider dealing is neither efficient nor beneficial for outsiders. When doing this, the supporters of legal insider trading believe that regulators and authorities will be spending a great deal of money and time in vain. They are convinced that even if insider trading were to be regulated, there are no means to combat it.This is mainly due to the complexity of this action and the elements that constitute it. However, although insider dealing is an extremely difficult action to detect, combating it can be achieved by preventing
it. This approach has shown great results in the UK market. Yet this policy can be developed to be more effective and less harmful to companies, as they may be affected by the restricted liaison between different departments. In other words, a proactive approach is the right solution and regulators ought to work on improving this policy in terms of both preventing insider dealing and not affecting the performance of organizations. This task, despite being extremely difficult, has to be done, as regulators ought to do their utmost to provide the highest possible level of market integrity.

Bibliography

Boudreaux, D. J. (2003). Insider-trading prohibitions should go out of style. Retrieved
August 28, 2008, from www.ff.org/comment/com0306fasp

Cole, M. (2007).Insider dealingin the city. Retrieved September 3, 2008, from www.fsa.gov.uk/pages/Library/Communication/Speeches/2007/0317mc.shtml
McVea, H.(1993). Financial conglomerates and the Chinese Wall Regulation conflict of interest. Oxford: Claredon Press.

Suter, J. (1989). The regulation of insider dealing in Britain. London:Butterworths.