Insider Trading and the Movie Wallstreet

“Greed is good; greed is right; greed works.” Although the validity or correctness of the statement is questionable on multiple grounds, when Gordon Gekko uttered these infamous words he accurately explained the rationale behind many financial, or more specifically, Wall Street decisions. Greed ensures that the course of action is only determined by the resulting monetary wealth, not by other factors such as societal and legal effects.

Wall Street follows the quick rise of a young low level account representative, Bud Fox. Eager to make his riches and gain notoriety, Fox persistently solicits his services and market opinions to tycoon Gordon Gekko, a broker known for his ruthless tactics. Through a stroke of luck Fox earns the opportunity to speak with Gekko for five minutes and pitch him a deal. Fox’s thoroughly researched stock pitches are no good for Gekko, in fact, he considers them “dogs.” He wants a fresh lead, one that the others in Wall Street haven’t caught onto yet. “Fund managers can’t beat the S&P 500 ‘cause they’re sheep. And sheep get slaughtered.” Gekko compares the typical fund manager to sheep because they are following the behavioral approach of investing. They look to others for guidance and mimic their moves not because they think it is a wise or beneficial investment, but simply because they assume that since others are doing so, it must be a smart move.

Gekko tells Fox that his extreme wealth is due to his aggressive investment strategy. He considers the other Wall Street brokers to be foolish and uneducated as to their random choices of investments. “I don’t throw darts at a board, I bet on the sure thing.” Gekko explains to Fox that he did not build his empire through good guesses or luck; he had to be certain of the outcome before he would give up his money. Anyone with even a general understanding of the stock market knows how volatile it is, and hence, a sure outcome in an efficient market is an elusive dream. Insider trading is Gordon Gekko’s insurance policy that affirms a positive outcome for his investments.

The United States Securities and Exchange Commission defines insider trading in two ways. Insider trading is legal when corporate insiders such as employees, directors, and officers buy or sell stock in their own companies. This is permitted by the SEC as long as they follow protocol and report their trades to the commission. The second and illegal form of insider trading is the one that people are more familiar with. “Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security. Insider trading violations may also include "tipping" such information, securities trading by the person "tipped," and securities trading by those who misappropriate such information.” In