The U.K. is in the midst of a grand experiment in the legalization of insider trading. Although technically prohibited, insider trading takes places ahead of a quarter all deals in the UK but there have been no prosecutions this year and only eight since 2001, according to the Financial Services Authority.
Responsible people assume that insider trading is hurting the status of UK as a trading hub. “If the U.K. aims to become a central place for international business then we must have impeccable quality control,” Peter Hahn, a former Citigroup investment banker and now fellow in corporate finance and government at Cass Business School in London told Bloomberg. “The scale of the problem is serious.”
The market seems to indicate otherwise. During this period of widespread de facto legal insider, the UK has become the most active market for initial public offerings. The number of IPOs in the UK this year is up 300% over the same period two years ago. It is now the third-largest equity market and accounts for about 20% of all trades in Europe.
While there must be costs associated with rampant insider trading, the benefits of non-enforcement may be even greater. Enforcement and compliance can deter market participation by investors. And insider trading itself can make the market more efficient by increasing the amount of information in the market.
No-one seems to be talking about these possibilities. Officials at the agency want to change the laws to make it easier to prosecute insider trading. And, of course, they want more money, staff and better office supplies. But “officials” of almost every sort always want more power, personnel, perks and money, so that’s hardly news.
What is news is that the UK has inadvertently undertaken this experiment in legalizing—or ‘legalising,’ as they would say—insider trading. And it seems to be working out pretty well.
FSA Struggles With Insider Trading That Doesn't Happen in U.K. [Bloomberg]
Posted by Iceman, Jun 13, 2007 11:06AM
"While there must be costs associated with rampant insider trading, the benefits of non-enforcement may be even greater. Enforcement and compliance can deter market participation by investors."
Dead wrong. Legalized insider trading would turn the market into a rigged game, where only those with inside information could make any real money - and public investors would quickly learn to stay away. The profits from any overvalued or undervalued stock would go to those inside the company's high management who would be aware of the discrepancy and pounce on it. And what would prevent insiders from say, buying or selling huge amounts of the stock before a major corporate announcement - an earnings report or merger or new product, etc.? Even the best research staff wouldn't stand a chance if corporate management were allowed to trade on their inside information.
I agree that there are some problems with Sarbanes-Oxley, but it needs reform, not elimination. The US capital markets are the cleanest in the world, and the extensive insider trading rules and disclosure requirements, expensive and time-consuming as they may be, keep them that way. The costs of compliance are insignificant in the grand scheme of things for large or medium-size companies. While compliance costs do make it difficult to be a small public company, there really isn't that much need for small companies to be public before they reach a reasonable size and stability - there are plenty of opportunities for private financing for companies at that level.
I would look at the quality of London's IPOs rather than the quantity - they are attracting a lot of frauds and junk companies. London's overall market is thriving not because of its lax level of regulation and enforcement, because it is the market of choice for listing for many of the booming emerging markets - India, the Middle East, Central Europe, and Russia.