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

58 4 Insider Knowledge and Insider Trading
Knowledge that already exists but is withheld by the market, for the purposes of
private exploitation by agiotage, is unproductive knowledge. 14
Insider Trading and Short-Termism
Insider trading in the stock market is unproductive, because it is used neither for
arbitrage (the equalization of price differentials between different points in space)
nor for speculation (the equalization of price differentials between different points
in time). Insider trading is carried out within the same market, and aims to make
short-term capital gains without bridging longer periods of time. Above all else,
the short-termism of insider trading indicates that it serves neither the purpose of
absorbing uncertainty nor that of true capital investment. Both the absorption of
uncertainty and the investment of capital require investments to be held for longer
periods.
But insider trading cannot be prohibited by law purely because it is short-termist.
If the speculator, abiding by correct and responsible practices, reaches the conclusion
that it is the right economic decision to close out an investment after an
ultra-short holding period because changes in the economic fundamentals require it,
this can be perfectly moral and is also the economically efficient solution. Therefore,
the short-term nature of an investment is not, per se, an indicator of insider trading,
nor is it a sufficient reason to prohibit and preclude it by law. 15 At this point, the
decisive factor is the intention, i.e. whether the investor was intent upon insider trading
from the outset, or had in mind a serious, long-term investment and/or the useful,
uncertainty-absorbing form of speculation.
Insider Trading and the Duty of Ad Hoc Publicity
Insider information is unproductive information, because the general availability of
this information is only impeded by the fact that it is deliberately withheld from
the market. The use of insider information has no beneficial effect on the economy,
because it is not an act of arbitrage between venues or of speculation between points
in time. McGee bases his argument in favor of the legalization of insider trading on
the fact that in transactions of the arbitrage type, the arbitrageur is not obliged to
inform the potential buyer that the good offered by the arbitrageur is on sale at a
14 For the distinction between productive and unproductive knowledge, cf. H.-B. SCHÄFER,
C. OTT: Lehrbuch der ökonomischen Analyse des Zivilrechts [Economic analysis of civil law],
Berlin, New York, Tokyo (Springer) 1986, pp. 300ff.
15 RICHARD T. DEGEORGE.: “Ethics and the Financial Community: An Overview”, in: O. F.
WILLIAMS, F.K.REILLY, J.W.HOUCK (eds.): Ethics and the Investment Industry, Savage
(Rowman & Littlefield) 1989, p. 213, bases his critique of insider trading on its short-termism
and calls for tax legislation to levy a 100% tax rate on short-term capital gains.