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

Insider Trading as Pseudo-Speculation and Agiotage 59
lower price in some other venue, or, in the case of speculative trading, that the price
will probably decrease in the future.
McGee quotes Thomas Aquinas, 16 who disputed that the seller had any duty to
inform the purchaser about such price differentials between geographical venues
or points in time. McGee, however, overlooks the premises underlying Thomas
Aquinas’s argument, namely that arbitrage is economically and socially beneficial
because it equalizes price differentials between different markets. 17 Arbitrage will
only take place if there are incentives for it, namely the chance of making profits
by bridging price differentials between different markets. Where these incentives do
not exist, arbitrage will not take place. If a buyer had the duty to inform a seller of
grain in place A that grain actually commanded a higher price in place B, the seller
would not sell him the commodity but would ship it to market B himself and sell it
there. By doing so, the seller would take possession of the earnings from the efforts
invested by the arbitrageur, whose work would then go uncompensated. In order to
encourage useful trading it is therefore necessary to permit arbitrage in trading. This
is why Thomas Aquinas and the theory of natural law permit arbitrage trading.
Where trade consists solely of agiotage or pocketing a mark-up, rather than arbitrage
or speculation, the buyer or seller is not entitled to withhold the information
on which the transaction is based or to derive a profit from his knowledge about
future price changes. Since the insider has not invested in productive but unproductive
knowledge, he is not entitled to derive a profit from a knowledge advantage
that he has gained over his competitors illegally, or that is not value-adding in
character.
Detrimental Effects of Insider Trading on Allocation,
Distribution, and Stability
Insider trading leads to a reallocation of resources from speculation towards pseudospeculation,
and from the dissemination of knowledge towards the withholding of
knowledge. There is reason to concede that share purchases by insider traders can
give rise to a minor knowledge-dissemination effect in the stock market, and also
that a minor effect from the spreading of share purchases over time, which can be
helpful in cases involving corporate takeovers, is brought about or supported by
insider traders. Nevertheless, these beneficial allocative effects are far outweighed
by the misallocation of resources into the search for unproductive insider information,
by the perverse incentives of insider trading to increase price fluctuations and
destabilize the stock market, and by the problematic distributive effect of profits
from insider trading.
16 MCGEE (1988), p. 37, discussing THOMAsAQUINAS, Summa theologiae II-II, p. 77, art. 3(4).
17 THOMAS AQUINAS, Summa theologiae II-II, qu. 77, art. 3(4), discusses this question and
explicitly accords arbitrage an important, morally justified economic function.