ASK any market participant where they stand on insider trading and you’re likely to be met with an awkward silence – particularly if you’re a financial journalist. As a criminal offence it is obvious that no-one in their right mind is going to publicly admit to trading on inside information. Yet City watchdog the Financial Services Authority (FSA) reckons there is a huge problem, with a slew of criminal and civil cases set to hit the headlines this year.
Indeed, scrutiny of market activity just before major announcements such as takeover deals reveals that some form of insider trading is almost certainly taking place.
But, given that all market participants trade based on normal chatter or “colour” – the raison d’être for markets – where should one draw the line between market normal gossip and inside information?
According to the FSA, the problems come when people actively trade on the back of a piece of information they only know as a result of being an insider.
In this week’s case involving former Evolution Securities analyst Robin Chhabra he passed important and confidential information about forthcoming announcements relating to two of his clients to a friend who then placed lucrative spread bets – often within minutes of getting the information. The pair are awaiting a decision on the appropriate action the Financial Services and Markets Tribunal will take, but a fine and ban is likely.
Chatting to City workers about this topic over the past few days has yielded few details on the potential scale of this problem, other than a knowing look or raised eyebrow. Some even joked that if the FSA were serious about clamping down on insider trading, hundreds of people would find themselves up before the beak. This scenario could yet happen, however.
The FSA enforcement chief Margaret Cole is leading a drive to present credible deterrents to insider trading by pursuing criminal actions or the civil offence of market abuse if there is not enough evidence of criminal intent. So how can honest market participants protect themselves from allegations of insider trading?
Daren Allen, partner at City law firm DLA Piper, says market participants unsure of whether they are going to compromise themselves by trading should consult their compliance departments, or check the relevant sections of the FSA Code of Market Conduct.
Allen explains that, as a rule of thumb, if information is specific and precise, price sensitive and not in the public domain then it’s a fair bet this constitutes inside information.
The FSA is determined to send a clear message this kind of behaviour will not be tolerated. And with two criminal cases set to be heard in court this April and a host of other civil actions pending, insider trading is certain to become an even hotter topic this year.