The Study On The Behavior Of Insider Trading In Security Market And How To Take Precautions Against It

Insider trading has become one of the most heavily regulated capital market transactions. It is known that the insiders squeeze abnormal profit with private information and this action reduces the information efficiency and appropriate resources, which will do harm to the market. In fact, the efficiency of insider trading regulation is not satisfactory, especially in China. Some scholars have viewed insider trading prohibitions unfavorably. This view finds its classic expression in the work of Marine (1966). One Marine' s for allowing insider trading is that such trading allows the information to be rapidly impounded in the prices of securities and thus increase the efficiency of capital markets. Another is that insider trading can improve the incentives of the managers.Based on the two contrary opinions, this article analyzes insider trading from economic aspect as well as behavioral finance aspect. The article first undertakes the impact of insider trading on market efficiency. Rational Expectation Equilibrium with noise is applied then the conclusion is derived that permitting insider trading will decrease the market efficiency and aggravate the fluctuation of the stock price. After considering the impact of the insider trading on the allocational efficiency, the conclusion can be gotten that insider trading in security market will do harm to the efficiency of the security market. Then, in the state of Rational Expectation Equilibrium, the level of output and the welfare of the shareholders will be increased under some conditions. The article also carries on the discussion to the beneficiary of the inside trading of security market question in our country, the beneficiary who forbids the inside trade is institutional investors, but not medium and small investors. The model of positive feedback can explain this. However, that is not mean that insider trading should not be controlled. Following conducting empirical studies of the insider trading in China' s security market, the article states the necessity of the insider trading of the security market and puts up some methods against insider trading.