It is not completely illegal, it is just to protect Imperial monopoly.
But you can see several traders, enchanters and such who sell them normally.
Correct conclusion is that unauthorized trade in Dwemer artifacts is illegal.
Btw, exemptions from Imperial decrees are valuable tool in negotiations and for keeping in check possible dissenters
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It could also be that those traders don't care, or that in this case, gameplay just does not accurately reflect lore. In fact, it's pretty clear that at least SOME traders who trade in Dwemer artifacts should not be doing so, as is made apparent by the Thieves Guild quest where you had to free some unsightly Bosmer in Pelagaid, this was done by threatening one of the Legion members there to reveal that she takes bribes from the trader to keep the fact that he trades in Dwemer artifacts secret, there would be no need to bribe someone about this if it were legal.
It's probably as has been said, though, the Emperor want to make sure that he can use any useful items that might be found for his own ends.
This holds true for both TES III: Morrowind and TES IV:Oblivion.
Actually, if I remember correctly, Orcish is better than Dwemer in Oblivion, but worse than ebony, in Morrowind, this comparison was not an issue as Orcish armor was medium armor in Morrowind.