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The UK’s De Facto Legalization of Insider Trading

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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]