Insider Trading

When a transaction from an insider-supplied tip on a publicly-traded stock exchange occurs, the laws of supply and demand ensure that the buyer or seller on the other side of that transaction benefits.

Insider-trading tips are, by definition, exclusive and not commonly or publicly-held information. Those on the other side of the transaction are not privy to this information; indeed, if they were, logic dictates that they would be performing the opposite transaction.

A stock-exchange is the coming together of a large number of buyers and sellers who transact their business anonymously. I have no clue who buys the shares I sell nor who sells the shares I buy.

But the buying and selling that takes place on the floor of the stock exchange is subject to the laws of supply and demand.

Suppose I have insider information that company A is not going to receive FDA approval on a drug it has been working on for years. Selling my stock before this information becomes public knowledge would be prudent because, once known, it is logical to assume the stock price will fall.

However, the buyer who buys my stock is anonymous…and this buyer would be in the marketplace attempting to buy the same quantity of stock regardless of whether I decide to act on my insider information and place an order to sell. His presence in the marketplace is 100% exclusive of any decision I make; he will be there regardless.

The laws of supply and demand state that the more buyers there are for a commodity the higher the price the commodity being traded will fetch; the more sellers there are, the lower the price.

My presence in the marketplace selling the stock in question means that the price that the stock will eventually be sold must be less than what it would be without my presence in the marketplace. The buyer, who will be there regardless of whether I am there selling, benefits from my decision to sell by obtaining the stock he seeks at a price lower than what he would have paid for it without my presence.

The laws of supply and demand create the same effect if I had insider knowledge and was buying instead of selling.

Insider-trading is not only a victimless crime, it is unique in the annals of the criminal code in that the alleged victim is the beneficiary of the alleged crime.

July 3, 2002