The growing revelations about insider trading on Wall Street are another illustration of my rule of scandals: the scandal isn't what's illegal, the scandal is what's legal. A few young sharpies are charged with committing excessively crude versions of the basic stock-market transaction -- people in the know making money off people who aren't in the know. Information is the mother's milk of Wall Street, and it's only valuable if you've got it first.

The media have taken up the theme that this outbreak of insider trading is caused by the excessive greed of the younger generation, after a recent set of arrests. "Twisted values did them in," opines Dr. Joyce Brothers in the New York Post. Actually, greed has not been unknown on Wall Street before now. In fact, it's hard to think of any selfless reason for playing the market. But two recent developments have given greed new opportunities for self-expression.

First, the merger wave has created a whole new category of sure-fire inside information. Because the deals are complex, dozens of people end up knowing that a share now trading at $40 or $50 is about to be worth $60 or $70. Second, exotic new forms of trading in options and futures and option futures have produced new ways to bet at long odds on small changes -- either way -- in a stock price. This makes it easier to cash in on tiny bits of good information.

There is a school of thought that insider trading is a "victimless crime." It's true that the victim of any particular trade is often hard to identify. The person who sells to or buys from someone with inside knowledge on a public stock exchange would have traded with someone else at about the same price if the insider hadn't come along. However, it's a mathematical certainty that when insiders benefit, outsiders lose. Nothing about insider trading affects the price of a stock in the long run. (Indeed, the value of inside information comes from knowing in advance where a stock is heading anyway.) Therefore, the profit of those with inside knowledge comes from the pockets of those without that advantage.

On the other hand, the effort to make the stock market a "level playing field" for Ivan Arbitrageur and Aunt Arlene in Florida alike is futile and probably would destroy the market if it succeeded. A stock price is the capitalized value of all the known information about that stock. The more information there is, and the quicker it comes out, the better the market functions. But someone must have the information first, and the Wall Street professionals need an incentive for ferreting out this information. The distinction between "good" information that is the proper reward for resourcefulness and "bad" information that amounts to cheating isn't even clear in theory, let alone in practice.

Looking for a middle ground through this conceptual swamp, the Securities and Exchange Commission and the Supreme Court have come up with distinctions that make no sense. The court has held that profiting on inside information isn't wrong unless you're violating a "fiduciary duty." Suppose you're a corporate officer. If you know your company's stock is about to go up, you're denying some shareholder his rightful profit when you buy his shares at the lower price while he's in the dark. Likewise if you're a banker or a lawyer for the company involved.

Trouble is, this theory seems to let you off the hook if you profit from secret good news about some other company (say, the fact that your company is about to take it over). And what about bad news? Your shareholders don't lose anything if you sell your shares without telling them, and they can't possibly gain from your making the bad news public sooner. Yet all these inside trades seem as unfair as the first kind.

The SEC has an alternative theory called "misappropriation." Under this theory an appeals court recently upheld the conviction of R. Foster Wynans, the Wall Street Journal reporter who tipped his friends about stocks he was going to recommend. The idea is that the value of The Journal's recommendations belongs to The Journal, not to the reporter. But surely the people Wynans cheated were not the shareholders of Dow Jones, which owns The Journal. The judge remarked that it would be perfectly okay for The Journal itself to profit secretly from advance knowledge of its own stock tips. This seems absurd, yet it naturally follows from the theory.

We'd be far better off with straightforward rules recognizing that the unfairness of insider trading is to all other players in the stock market, not just to the other party in particular trades. But no regulatory theory, however strict, can eliminate the unfair advantage on Wall Street. Most people acting on inside information may not even know where it came from or whether any particular item is reliable. But insiders, in the broadest sense, get information that is better on average than what outsiders get. No fancy conspiracies are necessary, of the sort that SEC investigators have been exposing. It all happens in the general swap meet of Wall Street gossip. That's why the market responds to almost every major takeover several days before it's announced.

The high-powered arbitrageurs (i.e., speculators) who are attracting so much suspicious attention barely need to lift a finger, let alone break the law, to get privileged information about the future direction of stock prices. Cluing in the "arbs" is a standard part of any takeover attempt, because their activity adds pressure on management to make a deal. At this point, the mere fact that a leading arbitrageur is thought to be buying a stock is enough to send its price up.

It's almost enough to make you feel sorry for those guys who got caught.