Views on improving the integrity of global capital markets
11 October 2012

Insider Trading: A Global Issue for Capital Markets


Type “insider trading” into your favorite internet search engine and a virtually endless list of articles will appear. Stories cover countries and markets of all sizes. For example, on 10 October, the Philippines Securities and Exchange Commission announced its ongoing investigations of several cases involving suspected insider trading or market manipulation. The trading on material nonpublic information is a longer-term phenomenon, to which regulators are steadily increasing their enforcement activities.

Individuals and firms familiar with CFA Institute are sure to know our stance against acting on insider information. The Code of Ethics and Standards of Professional Conduct, to which all members and candidates must abide, section on integrity of capital markets contains Standard II(A) — Material Nonpublic Information. This standard states that “Members and Candidates who possess material nonpublic information that could affect the value of an investment must not act or cause others to act on the information.”

For asset management firms operating across the globe, the provisions of the Asset Manager Code of Professional Conduct also include a direct prohibition of these actions. Provision C.1 in the section related to trading activities requires that managers must “not act or cause others to act on material nonpublic information that could affect the value of a publicly traded investment.” But we are a long way from either a local or global marketplace comprised of only firms and individuals who choose to abide by such high standards of conduct.

As we have seen, capital market regulators also have restrictions and regulations related to insider trading. Additionally, the business media contributes to the discussions through reporting not only the bad news but also by helping to improve the understanding of the pitfalls of trading on privileged information. A recent segment on The Firm, a show that addresses corporate law and financial regulations for CNBC in India, delved into the topic with vigor.

The Firm segment on “Insider Trading: World View provided useful information on the debate around insider trading for all market participants — traders and investors. This included a table of laws and regulations from various countries and the sanctions that may be imposed if convicted.

The segment further presents information on both the pros and cons of the insider trading discussion. In regard to prohibiting such trading, the regulations look to prevent information asymmetry.  Having individuals with privileged information creates a situation where “market participants who don’t have access to inside information leave the markets after suffering losses,” possibly leading to further market inefficiencies, according to the show’s transcript.

The discussions against prohibitions focused on the reaction of others in the market that such insider trading provides. The reasoning, according to the transcript, is as follows: “The actions of market participants in possession of inside information have a signaling effect to other market participants, bringing the prices closer to their fair value and enhancing market efficiency.” However, there is the recognition that this view is unlikely to gain acceptability for “the general perception of insider trading being inherently unfair and harmful for small investors and, therefore, the need to regulate insider trading to protect innocent market participants.”

The combined actions of these many players are important to regaining the trust of the investors that have been provided too many reasons to sit on the sidelines and watch the market over the past few years. Re-engaging confident investors is important as effective capital allocation is needed throughout the world economies to provide growth and opportunities for all.

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About the Author(s)
Glenn Doggett, CFA

Glenn Doggett, CFA, was a director of professional standards for CFA Institute. His responsibilities included providing member guidance in applying the ethics and standards of practice policies, supporting related educational and public awareness activities, and working with the Standards of Practice Council of CFA Institute on its initiatives. He was a co-host of the free, live, interactive webinars used by CFA Institute to promote ethical decision making and global best practices. Previously, Mr. Doggett, as a member of the CFA Institute Financial Reporting Policy Group, represented membership interests regarding reporting and disclosures initiatives, including XBRL. Prior to joining CFA Institute, he worked in the financial information sector with SNL Financial, where he focused on the real estate and energy industries, directing the development and maintenance of a financial data storage system. Mr. Doggett holds a BA in economics from the University of Virginia. He was awarded the CFA charter in 2006 and is a member of CFA Society Virginia.

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