You may think it’s just a tiny minority who are involved in insider trading, a highly illegal type of fraud, but its actually a staggering one in five (or 19.8%). That’s the number of price movements in the two days ahead of company announcements that are seen as ‘abnormal’ by the Financial Services Authority. That’s the latest figure released by the City regulator, and although the figure may seem alarming, it is actually the lowest level of insider trading seen since 2003.
‘What defines ‘abnormal’ activity?’, you ask. Well, any unexplained flurry of share buying or selling in the days or hours before a company announces financial results or a new product. Or before a company gets bought out. Or goes bust. You get the picture. Anyway, given the lip service the FSA has paid to curbing insider trading, the figure is not that impressive: it was 21.2% last year, and although this represents a 1.4% drop in a single year, critics say that one-in-five remains deeply unacceptable.
But it is not easy to find a solution to bring an end to the practice. It is certainly not illegal to take a punt on the direction of a share price before a company makes a formal announcement, and the FSA just doesn’t have the resources to mount investigations into every investor whose luck looks too good to be true. In other words, it’s almost impossible to catch people out, and only a few people a year are done for it.
If you are caught though, the FSA really does take you to town: last year Rameshkumar Goenka, an investor based in Dubai, was personally fined £6.1m for trying to manipulate the share price of London-listed Indian company Reliance Industries. His was the largest-ever sanction against an individual, but it certainly told the City to watch out…
Whether the FSA’s successors, the Prudential Regulation Authority and its parent Financial Conduct Authority can rein in the insider-trading scene from next year remains to be seen. It seems unlikely that banks and their financial instruments will start playing a different tune…
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