Why is Insider Trading Illegal?
A practical issue is that insider trading transfers wealth from most investors to the few insiders. If this were permitted, non-insiders would rarely make any money, and they'd stop investing. That would then defeat the purpose of the capital markets which is to attract capital. A moral issue is that managers and operators of a company should act in shareholders' interests. Insider trading directly takes money from other shareholders and transfers it to the insider. It's a nasty conflict of interest (and would allow any CEO of a public company to make ton of money quickly, regardless of their job performance). In short, shareholders and management should succeed or suffer together, so their interests are as aligned as possible and managers have the proper incentives. "@sdg - If you can be flippant, I can be pedantic. Insider Trading is not illegal. Any employee of a company can be an insider, yet most of their trades are perfectly legal. What is illegal is trading on Inside Information. Such information may be available to those within a company, or those who have some contact with an employee. In fact, if I am seated at a restaurant table and hear Bill and Warren talking about a purchase they plan to make, I am in possession of inside information and risk prosecution should I purchase shares and profit.  Often, a company will have a ""quiet period"" before earnings reports or potential stock-price-moving-news. During this time, employees are forbidden from buying or selling shares, excluding those that would be automatically bought in their retirement accounts or ESPP." "I'm surprised at the tone of the answers to this question! Trading with insider information is corruption and encourages fraud. As in many areas, there's an ethical line where behavior the gap between ""ok"" and ""illegal"" or unethical is thin. The classic local government insider information example is when the local councilman finds out that a highway exit is being constructed in an area that consists mostly of farmland. Knowing this, he buys out the farmers at what they think is a premium, and turns around for 10x profit a few months later. In that context, do you think that the councilman acting on that insider information is committing a crime or ethical lapse? Most people say yes.  Even in this case, the line is thin. If the same councilman has his finger on the pulse of growth patterns in the area, and realizes that the terrain makes a certain area a prime candiate for a highway and exit, buying up land would not be criminal -- but it would be risky as it creates a perception that he is abusing his position." To be flippant: it is illegal because it is against the law; there is no considered involved, it just is. To elaborate, part of the illusion of the stock exchange and other market-like entities is that of (apparent) fairness. If I think a stock will go up because it is involved in a growing industry, that is generally public information.  Conversely if I have a dim view of a particular company because of its track record of product launches, that is similarly out in the open. A secret formula is something that I invented or discovered, not (presumably) something that I stole from someone else. To stretch that further: If I notice that Company X stock always moves with Company Y stock, that is indeed something that I have found, that I can try to profit from.  It is secret to me, but not particularly dependent upon information not available to others, just that my interpretation is better. So trading on information in the public domain is fine, as it preserves the principal of fairness I mentioned, whereas inside knowledge breaks that principal. Capitalism works best when there is transparency.  Your secret formula for wealth in the stocks should be based on a fair and free market, as sdg said, it is your clever interpretation of the facts, not the facts themselves.  The keyword is fair. Secrets are useful for manufacturing or production, which is only a small part of capitalism.  Even then we had to devise a system to protect ideas (patents, trademarks and copyrights) because as they succeed in the market, their secrecy goes away quickly. "Illusions of transparency. Mitigation of risk. Emotion. The system.  Short answer per sdg's post - it's the law. Long answer which I wont get into - it's a philosophical stance. It makes people feel better. It encourages a sense of ""the system really does work.""" "Secret formulas are legal, ""privileged information"" is not. And that may be the whole point. People are allowed to trade stocks profitably if doing so results only from their skill. A ""secret formula"" (for evaluating information) is part of that skill. But having ""privileged information"" is not considered skill. It is considered an unfair, illegal advantage. Because company officials (and others) with privileged information are 1) not permitted to trade stocks while that information is privileged and 2) are not allowed to share that information with others. Inevitably, some do one or the other, which is why they are prosecuted. ""Raj"" took the process to new highs (or lows). He not only ""dealt"" in privileged information, he PAID for it. Anything from a new car or house to $500,000 a year in cash. In essence, he had a bunch of strategically placed ""spies"" inside or close to corporations including one on the board of Goldman Sachs, ""selling out"" their companies, and thereby practicing a form of corporate ""treason.""" "It is illegal because laws are written by people, and laws of stock trade are written, in part, to make it appear ""fair"" and thus contribute to the willingness of the people to invest their money in that particular venue. Profiting from information on the stock market that some people have and some can't have is considered ""unfair"", since it presumably excludes the latter from profit-making opportunities and thus makes their trades less profitable than otherwise. Since it is universally felt so, people made laws that prohibit such behavior.  I am not aware of any research that shows beyond doubt that allowing insider trading would really ruin stock markets, but such thing would be very hard to prove. There are arguments to both sides, and the side that supports prohibiting such trade has a clear majority, so it is prohibited."
In fact, buybacks WERE often considered a vehicle for insider trading, especially prior to 1982.  For instance, Prior to the Reagan era, executives avoided buybacks due to fears that   they would be prosecuted for market manipulation. But under SEC Rule   10b-18, adopted in 1982, companies receive a “safe harbor” from market   manipulation liability on stock buybacks if they adhere to four   limitations: not engaging in buybacks at the beginning or end of the   trading day, using a single broker for the trades, purchasing shares   at the prevailing market price, and limiting the volume of buybacks to   25 percent of the average daily trading volume over the previous four   weeks. The CEO of a public company can, and often does, buy (and sell) the stock of his company. In fact, frequently the stock of the company is part of the compensation for the CEO. What makes this legal and fair is that the CEO files with the SEC an announcement before he buys (or sells) the stock. These announcements allow us 'in the dark' people enough warning ahead of time.  See, for example, the trades of UTX stock by their public officers. As for trading on information about other companies, if I am not mistaken... that is why Martha Stewart wound up in prison. So, yeah, it does happen. I hope it is caught more often than not.  On a related note, have you seen the movie 'Wall Street' with Charlie Sheen and Michael Douglas? "First off, IANAL.  Secondly, most laws are different for humans and corporations.  But, insider trading is ""trading on knowledge that isn't publicly available."" If the trade was made after the order was made public knowledge, that would probably provide the fig leaf of legality." Very important. Returning again to the example of the farmer, efficient, liquid markets that fairly reflect the price of a given asset allow that farmer to run his business as cost effectively as he can. That (in theory) lowers the price of his goods for the consumer. If he wasn't able to efficiently hedge, he would have to charge a premium to reflect the price risk he takes on between planting and harvesting his corn.  Being pedantic here but single stock futures markets are extremely quiet. If you were the owner of a company and you traded *options* on your company stock (a hilariously common form of insider trading) yes, that would be illegal and the SEC would certainly come after you. I used to work at a record keeping company, and while we worked with plan administrators through transitions in investment offerings, we never actually worked through a forced sale.  From what I recall I thought that was illegal, and that all the administrator can do is stop offering the investment (i.e. no new buy ins), but people who still have their money in it can either continue to hold or sell. In principle I agree with you. However the allegation is that the people managing the IPO withheld crucial information and informed insiders against investing. Maybe the allegations are false, but it should still be looked into. If the IPO shared crucial details with insider traders while keeping it from the public at large that would affect the investor's risk-assessment of a stock, that's insider trading and should be punished accordingly. As others have said, it simply makes you a part owner. Even if you have ethical objections to a company's behavior, I'd argue that investing in it and using the proxy votes to influence the company's decisions might be even more ethical than not investing. Material Information means that any information that can reasonable affect the share price of the company [upward or downward] as looked by the investors. The idea is to provide a level playing field to all investors. Hence it forces people having material information not to trade when they have this information that is not yet disclosed. Yes it happens all the time and laws are quite stringent. There is monitoring of share activity by regulators ... hence most of the times the companies come out with their own guidelines and top & senior management is prohibited from trading in their own company’s shares for pretty much round the year except few windows the company decides is safe. Now it may not be possible to monitor every small material info, but any large spike of stocks after certain announcements is investigated by regulators to verify any undue gains. For ex a person who never trades suddenly buys large qty of shares and it goes up and he sells again ... etc "Overoptimism, making mistakes and wrong assumptions, being taken by lies, all of that is legal and, in a lot of ways, very human and forgivable.  But when they ""buried her findings ... before, during and after the financial crisis, and even into 2012"" from senior management whose job it is to look out for bad investments, ""buying mortgages from outside lenders with doctored tax forms, phony appraisals and missing signatures"", ""systematically violating U.S. mortgage regulations"", and lying about losses while still taking money from the government, these are illegal and immoral practices with profit as a motive and with the knowledge that what they were doing was wrong.    Buying into something with all you've got is any business's prerogative.  Lying, manipulating, and willfully breaking the law, especially when the product and means to purchase directly impacts the customer, all to maximize profit is not." An oxymoron is something that contradicts itself. Inside trading is sharing information that isn't public. How the fuck do you think these hedge funds and investment banks can offer almost 50% returns during these times in our economy??? Oh yea it's called inside trading. Reason why it's an oxymoron is because trading information is considered ilegal yet that what everyone does on the market, rules are made to give off fear but past that it's all open roads and deep pockets.    And if you really don't believe that stock market isn't rigged then there is no reason for me to explain myself on that because it would be like taking to a wall. And I thank you for being one of those people that thinks it's not rigged because you help my portfolio look good from your dumb investments. They are not required to fulfill the trade that they have intended to execute.  They are able to cancel or modify the trade at any point.  Example: This is how insiders are able to manipulate the price of shares through there buying and selling intentions.  A CEO would be able to disclose a buy order for a month from now, or whatever time period is required.  This would most likely increase the price of the stock as investors would see this as a good sign of company performance.  Up until the point when the buy order is scheduled to execute the CEO can then cancel the order and create a new sell order.  Since the stock is high in price, his new order is likely to make him money based on the manipulation from his trading intentions.   I am not an expert on the subject and only know as much as I do through personal research. Here is an interesting article about this kind of insider trading and manipulation:http://dealbook.nytimes.com/2012/12/10/the-fine-line-between-legal-and-illegal-insider-trading/?_r=0 "It becomes illegal when it is both material and nonpublic information. Material being defined as: Information that you would want and significantly alters the perception of the stock. To your point -- ""materiality"" is really up to the courts Nonpublic This is a little easier to define, but need to be careful if the information is disclosed selectively -- ie to just a small number of investment analysts -- this may still be nonpublic There is also an exception to this -- Mosaic Theory - This is the research you are referring to where the analyst calls up suppliers, etc and obtains information that is nonmaterial (wouldn't move the price of the security) but using experience and combined with public information creates something that is meaningful and could move the price of the security.  This is perfectly legal.  Material examples:" "Another way to look at this is that pure insider trading is an activity with the aim to use secret information to make personal profit or let others make personal profit at the expense of the company shareholders or investors. In buybacks, it is not company managers to get personal gain in this would-be ""insider trading"". The end-winners in this case are the shareholders. So there is nothing inherently bad in buying back stock. Moreover, it is a general practice to buy shares back (as opposed to paying dividends) when the company sees its shares being undervalued (of course, provided that it has the cash/borrowing ability to implement this), since it creates shareholders value, thereby maximising shareholder wealth, which is one of the primary tasks of the company managers." "I did once read a book titled ""How I made a million dollars on the stock market"". It sounded realistic enough to be a true story. The author made it clear on the first page that (a) this was due to some exceptional circumstances, (b) that he would never again be able to pull off something like this, and (c) you would never be able to pull of something like this, except with extreme luck.  (The situation was small company A with a majority shareholder, other small company B tries to gain control by buying all the shares, the majority shareholder of A trying to prevent this by buying as many shares as possible, share price shooting up ridiculously, ""smart"" traders selling uncovered shorts to benefit when the price inevitably drops, the book author buying $5,000 worth of shares because they were going up, and then one enormous short squeeze catching out the traders. And he claimed having sold his shares for over a million - before the price dropped back to normal).  Clearly not a matter of ""playing your cards right"", but of having an enormous amount of luck." pump and dump is a common Illegal practice of boiler room operations. It refers to the talking a stock up, both through word of mouth as well as selling shares to unwitting buyers. I fail to see much difference between that practice and this.