Read the following two discussions and give your response:

1. Define insider trading and give a specific example that has been in the news.

Insider trading is defined as a type of trading in which buying or selling of public company’s stock or securities based on available materials or non-public information of that company. The non-public information may be obtained from insiders of the company, such as executive officers, directors, employees etc. or outsiders of the board of company, such as a printer, who understands content of legal documents of the company; a financial analyst, who used to provide suggestion to his clients; a stockbroker, who obtains information by using relationship with company’s board members; a family psychiatrist; and a family lawyer etc. (Boatright, 2012). The insider trading can be legal as well as illegal based on circumstances. For example: if a executive member of company buys shares of stock of that company based on publicly available information and by reporting to the Securities and Exchange Commission. It is legal insider trading. On the other hand, if that executive member got secret information regarding merging of companies and share price is going to increase. Then, he buys shares in his family member’s name so that he can obtain profit. He used his insider knowledge and non public information without reporting the trade to Securities and Exchange Commission. This scenario reflects a case of illegal insider trading.

A specific example in the news: On February 5, 2014, a former SAC Capital trader Mathew Martoma was found guilty as being a part of a sweeping Wall Street insider trading crackdown (Gustin, 2014). Martoma was involved in illegal insider trading. He obtained secret information in advance from two doctors, who were involved in a 2008 pharmaceutical trial for an Alzheimer’s drug. This information helped him to prevent loosing of $276 million and gained for SAC. From this, he earned millions of dollars while working for Steven A. Cohen’s hedge fund SAC Capital. According to Bharara statement, Martoma was able to get $9 million bonus for avoiding losses and gaining billion dollars in profits for SAC (Gustin, 2014). The federal court involving 12 members jury in lower Manhattan, charged to Martoma as guilty and fined him $1.8 billion, which is the largest insider trading fine in U.S. history. In addition, SAC shut down his investment advisory business.

2. Discuss how insider trading negates equity and effectiveness and fairness in markets.

The main objective of the financial market regulation is to establish a fair efficient market with equity and effectiveness. If there is fairness or equity in the market, people concerning this market may feel safe and confident to invest so that they can earn more output in less input from the market (Boatright, 2012). However, it is not guaranteed to obtain only maximum profit. There may be loss in the business. Based on win-loss theory, a loss of one party means another party may gain in the market. This is natural process. If a party in the market obtains secret non-public information from the insider of the company, then that party invests based on that information. It is typically unfair advantage over other investors. This is a case of cheating. In such scenario, people may not trust in the fairness of market.

The party, who has non-public information in advance, may only get profits and other parties may lose it. Many investors spend a lot of resources, time, and money in order to study past and present status of the company before investing in that company. Their investments will be at risk if there is illegal insider trading. This scenario not only hampers economical condition of that company, but also the financial status of other investors. If such scenario spreads out to other financial institutes or companies, then it hampers whole economy of the country. There will be imbalance between wealthy and poor people in the country. Therefore, the illegal insider trading negates equity and effectiveness and fairness in the market as well as creates a severe economy in the nation.