The Ethics of Banking: Conclusions from the Financial Crisis (Issues ...

Chapter 4
Insider Knowledge and Insider Trading
as Central Problems of Finance Ethics
The stock exchange is the central institution charged with mediating supply and
demand in the market for capital. The question of what conduct is appropriate to
the matter of the capital market is a matter of intense debate, particularly with reference
to insider trading. Indeed, insider trading is a central problem in the economic
ethics of the capital market and the stock exchange. In Germany it has been prohibited
since 1 August 1994, when the Second Financial Market Promotion Act was
adopted. 1 Yet within the various schools of economics and jurisprudence, the debate
has not arrived at any consensus on the question of whether or not insider trading is
harmful, and hence, whether or not it should actually be illegal.
Insider trading is not the only problem of economic ethics in the capital market.
There are other issues that raise questions of what conduct is materially appropriate
to this particular domain: the ethics of investment and of the selection of shares
are aspects of the economic ethics of the investor, while the conduct of exchangelisted
firms towards their shareholders and the stock exchange is part of corporate
ethics. Important questions of economic ethics can also be explored by inquiring
into the ethics of the intermediaries and brokers in the capital market, the investment
advisors and bankers. These questions go beyond the insider-trading problem.
However, as the problem of insider trading touches on the ethics of all three
groups of capital market actors – the investors as suppliers of capital, the finance
departments of corporations as demanders of capital, and the financial intermediaries
as brokers between supply and demand – we can zero in on the ethics of the
capital market or a theory of ethical economy by analyzing the arguments for and
against insider trading. The German and the international debate on insider trading
is riven with controversy. The “front lines” of the discussion by and large mirror
the frontiers that divide economists and jurists. Whereas many economists advocate
insider trading based on the argument that insider trading raises the allocative
1 Zweites Finanzmarktförderungsgesetz (Gesetz über den Wertpapierhandel und zur Änderung
börsenrechtlicher und wertpapierrechtlicher Vorschriften: German Act Governing Securities
Trading and for the Modification of Regulations Governing the Stock Exchanges and Securities)
of 26 July 1994. Its main parts took force on 1 August 1994, the Act in its entirety on 1 January
1995.
P. Koslowski, The Ethics of Banking, Issues in Business Ethics 30,
DOI 10.1007/978-94-007-0656-9_4, C○ Springer Science+Business Media B.V. 2011
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