How does "insider trading" affect market integrity?

Insider trading undermines investor confidence by creating an uneven playing field within the market. When certain individuals have access to non-public, material information about a company, they can make trades based on that knowledge before that information is available to the general public. This practice leads to situations where insiders can profit at the expense of ordinary investors who do not have access to the same information, resulting in a perception of unfairness and manipulation within the marketplace.

As a consequence, if investors believe that the market is rigged or that they cannot trust the information provided, they may be less likely to invest or participate fully in the market. This distrust can decrease overall market participation, dampen trading activity, and ultimately impair the effectiveness and integrity of the financial system. Investors need to have confidence that they are operating in a fair and transparent environment where all parties have equal access to information.