It's insider trading, just with a different class of insiders (i.e. first level of insiders are people associated with the company itself, and the second level of insiders are Wall Street traders with access to non-public pricing signals).
Insider trading is illegal because it undermines faith in the fairness of the public market. If insider trading is legal, then market actions by insiders are almost guaranteed to result in the action being a poor deal for the other side. Either the insider is buying shares because they have strong confidence that the price is about to skyrocket (i.e. prior to the announcement of a massive sales deal), in which case the prior holder lost out when they would have preferred to hold; or the insider is selling shares because they have strong confidence that the price is about to crater (i.e. announcing very poor results), in which case the person purchasing the share probably would have preferred not to buy at that price. The end result is that nobody wants to buy or sell shares anymore (since they will get the raw end of the deal) and the market collapses as a result. When companies are privately held, buying and selling shares without insider knowledge (i.e. deals being conditional on due diligence) is much less common, so it's really only a concern for public markets.
Public markets absolutely depend on regulators enforcing that information asymmetry is kept to the absolute minimum possible, so that the market will be perceived as fair, so that people will continue to participate.
One of Matt Levine's common refrains is "Insider trading is not about fairness, it is about theft." There are always market participants with different levels of information. The problem occurs when you misappropriate confidential information you were entrusted with for personal gain.
I respectfully disagree with Matt Levine's framing. Yes, confidential information belongs, in a statutory sense, to the company, and using it for personal gain instead of company gain is a kind of theft, similar to an executive who uses their company car for personal trips, or any employee who might browse Facebook on a work laptop or take a personal call in a company office. But this argument is akin to saying that no senior executives should ever incur personal criminal or civil liability for the actions that they take in the name of the company, because it is the "company" that did it and not the individual. Most people (particularly after public implosions like 2008) find this argument reprehensible. In fact of the matter there are individual executives who do act in their personal interest. Should stock buybacks be illegal because it happens to be very much in the personal interest of the executive whose bonus depends on a rising stock price, while shareholders may have benefitted more from the executive focusing on day-to-day operations, thus the executive "robbed" shareholders because of making a decision to focus on the wrong thing? It's not reasonable to expect executives to "wear different hats" where one day they act out of their personal interest and the next they are some kind of selfless worker who works for The Company and whose only interests are the Board's and shareholders'. Executives are holistic individuals, they make decisions as holistic individuals, they were hired with the expectation that they would make decisions as holistic individuals, and in and of itself there is nothing wrong with that.
Rather, the theft is from the market participant who is getting the raw end of the deal. Legal trades require consent. If you sell someone a hard disk that you know crashed and is unusable, under the guise that it is working, you committed fraud. If you sell someone a new car that it turns out is going to break down almost immediately, you are subject to lemon laws and must refund or replace the car. If you had sex with someone in a case where consent was not in place, including in cases where the sex was pleasurable but the other person was defrauded to who you were (i.e. not their long-time partner), that is rape. And if you take stock that you're pretty confident is going to lose 80% of its value in three days when poor earnings will be announced, and offload it to an unsuspecting victim, no I don't think you can make the case that there is genuine consent here.
> The end result is that nobody wants to buy or sell shares anymore (since they will get the raw end of the deal) and the market collapses as a result.
Finance noob question here: has this actually happened?
And related, don't non-pro traders basically always lose money on trades but still exist?
(I've been genuinely unsure why insider trading by non-decisionmakers is banned, always seemed like it would result in more accurate prices)
Please don't define things when you have no idea what you are talking about. Everything in this post is simply wrong. Markets are not about information fairness, individuals are free to do research and come up with their own prices.
Individuals are free, in their research, to access sources of information that are available to all other market participants, even if that information is usually out of reach for most people. The canonical example is using satellite photos of parking lots to predict earnings calls, i.e. https://newsroom.haas.berkeley.edu/magazine/summer-2019/stoc... . It's still legal because hypothetically anybody could do it. What's not legal is "doing research" by talking to insiders to get information that is not public.
Was this supposed to defend your position that dark pools are illegal? Full stop it does not and will never meet the definition of insider trading. Your free to believe whatever you want but it does not meet the definition and your posts offer little more than strange steps into loaded words like consent.
Insider trading is illegal because it undermines faith in the fairness of the public market. If insider trading is legal, then market actions by insiders are almost guaranteed to result in the action being a poor deal for the other side. Either the insider is buying shares because they have strong confidence that the price is about to skyrocket (i.e. prior to the announcement of a massive sales deal), in which case the prior holder lost out when they would have preferred to hold; or the insider is selling shares because they have strong confidence that the price is about to crater (i.e. announcing very poor results), in which case the person purchasing the share probably would have preferred not to buy at that price. The end result is that nobody wants to buy or sell shares anymore (since they will get the raw end of the deal) and the market collapses as a result. When companies are privately held, buying and selling shares without insider knowledge (i.e. deals being conditional on due diligence) is much less common, so it's really only a concern for public markets.
Public markets absolutely depend on regulators enforcing that information asymmetry is kept to the absolute minimum possible, so that the market will be perceived as fair, so that people will continue to participate.