DEFINITION: The phrase “insider trading” refers to the practice of buying or selling corporate stocks, or other publicly traded securities, based on private information about the economic status of the corporation in question or pending government legislation or regulation.
“Private information,” in this context, means information obtained by virtue of one’s own position within a corporation or the government, or else through one’s connections with friendly parties who have such positions.
ETYMOLOGY: The word “insider” derives from the Old English preposition in, meaning “in,” and the Old English noun sīde, meaning “side.” Sīde is also related to the Old High German word sīde, with the same meaning.
The nominal form “insider” is attested beginning in 1848.
The word “trading” derives, via Middle English, from the Middle Low German word trata, meaning “track” or “course.”
The English word “trade” in its modern meaning of “having dealings” or “exchanging goods” is attested from the sixteenth century.
USAGE: The reason why insider trading is considered to be a bad thing is that it is based on an asymmetry of information between one of the economic actors in a marketplace and all the others.
Although some academic economists feel that insider trading ought to be allowed, most ordinary people feel that the practice provides the economic actor in possession of the privately obtained information with an unfair advantage.
That is the basic reason why various sanctions against insider trading have been enacted by different countries at different times over the past half century or so.
It is important to stress that it is not a question of the information’s having been obtained illegally.
Rather, the point is that anyone who comes into the possession of such information in the ordinary course of his affairs thereby assumes a moral—and, in most jurisdictions today, legal—obligation not to act upon it.
When an economic actor ignores this obligation, then in theory he should be subject to the sanctions provided for by law.
However, insider trading is hard to prove, which makes prosecution of the crime difficult and evasion of the legal sanctions easy.
For this reason, the practice continues to thrive. Indeed, thanks to modern communications systems, insider trading flourishes today perhaps more than ever before.