Insider trading is considerably illegal for its malpractice in using non-public material information. Despite the statement, is insider trading always illegal? Can’t it be legal?
The answer to the question is insider trading can be legal under some circumstances. Accordingly, to determine whether insider trading is legal, one must take a look at the context.
Apart from its relativity, a simple Google search mostly suggests that the form of trading is illegal. While in reality, it is not always the case.
Also Read: Insider Trading: A Form of Illegal Trading
What Qualifies for Legal Insider Trading
What contributes to the illegality of insider trading is the misuse of non-public material information and, most importantly, without the consent of the Securities and Exchange Commission (SEC). Looking beyond the simplification, the trading is possible to be legal so long as it does not fall into either one of the conditions.
Legal insider trading can refer to a transaction conducted by corporate insiders. Corporate insiders, such as directors, managers, employees, beneficial owners, and several other positions, have the benefits of doing so.
Accordingly, trading their very own stocks and securities, using their non-public material information, is acceptable by the law. That, also, works if it is under the consent of SEC.
A Brief History
Before SEC announced that the trading is illegal, it was considerably legal. To elaborate the statement, it used to belong to the benefits company execs had.
It was in the beginning of 20th century that it was still legal. At that time, trading using inside information was justifiable and, as a consequence, that was arguably a slightly common practice.
In 1909, in the US, it began to shift when the Supreme Court announced that ‘insiders’ of a company had to disclose insider information to legally trade. If they did not do so, they had to face two consequences which were forced to unveil the information or kicked from trading.
The warning, however, did not significantly minimize the number of the case as the term ‘insider’ remained undefined. It was 1920 and 1934 when the SEC and the Congress officially declared that it is legal until now.
Following the declaration, some famous cases emerged and several traders had to serve their sentence in prison. Among the cases, one of the most popular ones is the Martha Stewart’s case.
Also Read: A Short Anatomy of High-Frequency Trading
