LSAT 148, Section 2, RC Passage 3, Insider Trading

RC Passage 3 Explanation (Comparative)

Paragraph Summaries

Passage A

1. Insider trading is the crime of helping yourself or others make stock trades based on information you have due to your position in a company.
2. But, the point of the stock market is to trade on information you have and others don’t. Stock analysis and informational advantage is the basis of being a good broker: it isn’t criminal.
3. Stock markets work best when information about a company spreads quickly. Letting people with accurate information about stocks trade is a good thing.
4. For example, if you know a stock will be lower, and you sell it, that spreads information that that stock’s price should drop. That helps make for an accurate market, which is better for everyone.
5. Insider nontrading provides an interesting comparison. That refers to trades which would have happened, but don’t, due to insider information. Insider nontrading is a good thing, and no one thinks it should be a crime.

Passage B

1. Stock markets require transparency: everyone should have all information available at the same time. This leaves skill as the basis of good trades.
2. Insider trading compromises the market: people with inside information can make trades based on information that others don’t have. Therefore, other people can’t make money.
3. This would destroy investor confidence and reduce the amount of money invested in the stock market. This would make it harder for companies to raise capital.

Analysis

The two authors have different concerns. The first author wants stock price information to spread as quickly as possible. Insider trading allows this. The author doesn’t address total amount of funds invested in the market. Note that the author of passage A isn’t merely saying that insider trading should be allowed. They think it should be encouraged. Lines 16-30 show that the author thinks that speed of information distribution is very important, and insider trading speeds up information distribution.

The author of passage B has a different concern: making it easy for companies to raise capital. If stock investing is perceived as rigged, people won’t invest, and companies will find it hard to raise money and grow.

Both authors make good points. They disagree on whether insider trading should or shouldn’t be allowed. But other than that they mostly don’t address each others’ points.

Insider Non-Trading

Insider non-trading is an interesting example that may require an explanation. Let’s say you are an executive. You hold 10,000 shares of ACME corp. You learn that ACME corp is going to have a big loss soon. You would like to sell your stock, in order to avoid losing money. But, selling would be insider trading, so you can’t sell.

Now, consider insider non-trading. You are an executive at ACME corp, and you are planning to buy 10,000 shares of ACME corp stock for your retirement plan. But, suddenly, you learn there will be a big loss at ACME corp soon. So, you decide not to buy. This is insider non-trading, and it is perfectly  legal. The author of passage A thinks that this is a contradiction, and that both insider trading and non-trading should be legal.