Important to deter insider trading

THERE is a school of thought that insider trading is a victimless crime and should not be frowned upon because it is almost impossible to pinpoint its exact victims or quantify their losses. Some even believe that insider information, being of high quality because it originates from deep inside companies themselves from sources close to material events, serves a useful purpose because its use helps stock prices adjust to their true values quicker than would otherwise be the case.

Regulators everywhere, however, have banned insider trading because they know that financial markets can only function smoothly if there is confidence and trust that the playing field is level to the point that all participants have an equal chance of making (or losing) money. Since insider trading creates an unbalanced playing field it undermines that confidence, raises risk of unfair loss and so has correctly been deemed illegal in every market.

Having said that, it is worth noting that although studies suggest insider trading is fairly common, detecting and proving the activity is hugely difficult.