 |
 |
|
|
|
|
What is Insider Trading ?
Insider
trading - definition
The process of trading i.e. buying and selling of security or
stocks of a company by the corporate members like the presidents
and directors or other share holders is termed as insider
trading. In some countries and states, insider trading is
considered illegal as in many situations, non public information
as well as the trust and security of the organization is
embezzled. For example the United Kingdom government has made
such trading illegal in the country way back in the year 1980.
However, critics believe that the frequent up and down of the
stock market can be attributed to this trading that is still
operational.
The United States of America requires an account of the entire
insider trading operating in the country. The SEC or Securities
Exchange Commission has the list of all the insider trading
reported to the Government and is often used as a guide by the
potential investors to decide on shares and stocks that will
yield a high return. However, it is not always necessary that
‘legal insider trading’ will only contain non public
information.
Why should insider trading be
prohibited ?
Insider trading is extremely detrimental for the economic growth
of any country. To understand this more clearly let us get in to
the details of costs and the role of markets in any economy. In
an ideal situation, the securities market distributes the
capital in the economy of the country.
|
|
|
|
|
|
|
|
|
|
This is facilitated by ‘market
efficiency’ which essentially means that market price of each
and every security clearly shows the risks as well as the
returns or profit involved. So, it is the responsibility of the
various governments or jurisdictions to promote market
efficiency allowing the investors to understand the effect of
such trading in the market. Market efficiency can be increased
by the company insiders or the corporate executives as they can
predict the risks and profits involved in the shares and bonds
of their corporation; so, they usually identify the market
prices of the securities as extremely low or very high pretty
accurately. This knowledge can help in making the markets much
more efficient and the economy much more powerful and stable.
However, in most of the cases, insider trading is used in a
negative way. When the classified information i.e. the data not
meant to be disclosed to the public, is misrepresented or
manipulated, the stock and share prices move away from the
actual value and the efficiency of the market gets drastically
affected. |
|
Supporting or legalizing insider trading
In spite of the negativities involved in insider trading, some
well known economists as well as legal scholars like Milton
Friedman, Henry Manne, Thomas Sowell, Frank H Easterbrook and
Daniel Fischel firmly believe that the government or
jurisdiction of any economy should reconsider before announcing
this system as “illegal”. According to this group of experts,
the leaking of the non public information is not incorrect but
extremely helpful for all the investors as they get their hands
on completely new and relevant information. In the words of
Milton Friedman, recipient of Nobel Prize for Economics “…want
more insider trading not less.” He argues that the government
must allow the investors “…to have knowledge about deficiencies
of the company incentive to make the public aware of that.”
Others believe that there is no harm in insider trading. If the
insider or the seller does not have a bond that restricts him or
her from disclosing the information, there is absolutely nothing
wrong in trading the same with a willing buyer.
All the laws relating to insider
trading differ from one country to another
Though most of the jurisdictions in the world do not support
insider trading, the laws related to it are construed in
different manners. Let us take a look at some of these
regulations.
The United Kingdom
In the United Kingdom the laws governing insider trading are the
Financial Services Act of 1986 and the Financial Services Act of
2000. According to both these policies, insider trading is an
offense of Market Abuse. It clearly states that it perfectly
legal to make a deal before there is a takeover proposal and the
buyer purchases stocks and options of the company fully being
aware of such a happening.
|
|
Japan
Insider trading became illegal in Japan in 1988. However, the
decision has not been very well accepted by the population who
still believe that there is no harm in making money by getting
inside information of a corporation.
Malta
Malta declared that insider trading is illegal in the country in
its Financial markets Abuse Act that was passed by the
government in 2002. The Financial Markets Abuse Act has replaced
the Insider Dealing and Market Abuse Act of 1994.
The Core Principles of IOSCO
The International Organization of Securities Commissions, more
popularly known as IOSCO issued the first Objectives and
Principles of Securities Regulation in the year 1998 and later
modified it in 2003. These regulations clearly state that there
are three objectives of good securities market regulation; these
three regulations are: |
|
|
|
• Protecting the investor’s interest
i.e. ensuring that the prospective or current investors are not
duped by fraud malpractices like insider trading.
• Seeing to it that the markets are efficient, transparent and
definitely fair.
• Bringing down the systemic risk considerably.
Above three regulations discussed
are considered to be the Core Principles of the IOSCO and are
strictly followed by more than 85 percent of the world’s
jurisdictions and economies. Today these Core Principles are
also followed by the International Monetary Fund and the World
Bank in evaluating the financial status of a country’s
regulatory system in context of a company’s economic assessment
program; hence all laws relating to the insider trading by
publishing of non public information are seriously looked into
by the International community. Though the implementation of the
anti insider trading laws differs from one country to another,
almost all the governments of the world consider this practice
as illegitimate.
|
|
Article Contributed By: Sabina
Zacharias
|
|
|
|
|
