Is insider trading illegal?

Yes. Although at one time insider trading was a generally accepted way of life, and people just assumed that company insiders and their friends would profit from their special access to information, it is now illegal under various Federal Securities Laws. While good news and bad news is inevitable, the rules prohibit insiders in possession of such news from trading or causing others to trade on such news before it is generally released to the marketplace.

Insider trading damages those on the other side of the transactions - for example if an insider sold Cendant shares the day before the bad news was announced at $35, it is clear he would be better off than the person or firm who bought the shares from him at $35, only to see them drop to $18 once the bad news hit the market.

Insider trading also damages the stock market generally because it impacts investor confidence, deters people from investing (people are reluctant to invest if they see the market as a rigged situation), and harms companies whose confidential proprietary information is used to benefit only select individuals rather than the company as a whole.