The Capital Markets Cooperative Research Centre (CMCRC) has suggested that the dismissal of insider trading charges against Australian Trent Martin last week is less dramatic than some have interpreted, but still points to the importance of understanding the means by which changes to insider trading regulations need to be judged.
Professor Michael Aitken, CEO of the Capital Markets Cooperative Research Centre said that the decision had been seen by some as a ‘slackening’ of insider trading rules, but that was not the case.
“The fact is there is nothing new in this judgment – all that it is doing is requiring the prosecution to prove its case,” he said. “If the lower court judgment was any indication of what has been happening in the US then it appears that the prosecution has been able to convict on innuendo (namely that the defendants were professional traders so ought to have known such information they traded on was confidential) rather than evidence. And stopping that is clearly in the interests of justice.”
Professor Aitken said despite this, the case was a good example of the lack of clarity around how to judge whether a given change in insider trading was beneficial not.
“Academics since as far back as Henry Manne in 1985 have proffered opinions that insider trading should be permitted because it keeps the market efficient by getting information into price as quickly as possible and the argument is quite logical as far as it goes,” he said. However, Professor Aitken said such suggestions miss an important point.
“That point is that securities regulators are obliged to ensure that markets are both fair and efficient,” he said. “We cannot accept regulations (or changes thereto) that benefit efficiency to the detriment of market fairness or indeed one element of efficiency or fairness with another”.
Evidence available from the CMCRC with respect to one element of market fairness, namely the extent of market manipulation, shows that markets that have higher levels of particular forms of manipulation (such as marking the close) have higher transaction costs suggesting a trade- off between price discovery (the Henry Manne idea), one element of market efficiency and the cost of trading, a second element of market efficiency.
Professor Aitken noted that “Do No Harm” needs to be the guiding principle of all those who would change market design. This in turn means ensuring that neither element of efficiency nor indeed elements of market fairness can be worse off post the change which of course presumes that one can clearly define and measure each element which he says is the key problem at the moment. “If any element is worse off post a change in insider trading regulations, the change is sub-optimal.”
For more on CMCRC and insider trading, visit https://www.youtube.com/watch?v=w53sRnUTtKY and https://www.youtube.com/watch?v=S03vrqZ4pTQ