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Bane of insider trading
China sent a strong warning to commodity market speculators to desist from “excessive speculation”

Bane of insider trading

This week, I had the chance to read again, this time a lot more information, about why billionaire Joe Lewis has found himself at the wrong side of the law in the US. Lewis’ love for football has made him extremely popular, as he heads the family that owns Tottenham Hotspur Football Club in England.

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Lewis has been accused of “brazen” insider trading by US prosecutors. In court he pleaded not guilty to multiple counts of securities fraud and conspiracy.

This is what prosecutors are saying:  that Lewis' “brazen” insider trading scheme was to enrich his friends, lovers and employees, including two private jet pilots.

The allegations against Lewis dominated headlines in the international media about three weeks ago, and as a lover of football, I read a fair bit of the reports.

In a statement released by US attorney Damian Williams for the southern district of New York, Lewis had “abused his access to corporate boardrooms” providing confidential information to people who used his tips to make millions of dollars betting on the stock market. “Thanks to Lewis, those bets were a sure thing,” Williams stated.

Well, the general rule to promote market discipline is that you cannot buy or sell shares in listed companies using information that has not yet been disclosed to the markets.

 I have become interested in this developing story not because l am an Arsenal fan and therefore trying to find a way to troll my trophy-shy North London neighbours- Spurs.

 My interest in the topic is fuelled by its possible distortion to the functioning of financial markets—and I have written extensively about the topic in the past.

Let me recall a few examples of insider trading dealings that I have written about in this column.

In the May 29, 2021 edition of this column for example, I wrote about how in December 2005, two former columnists of the UK-based Mirror newspaper were found guilty of market manipulation.

 Anil Bhoyrul and James Hipwell were the two alternating columnists for the City Slickers page in the newspaper.

The column discussed finance issues generally, but became popular for its write-ups on companies listed on the stock exchange.

However, according to proceedings in court, the share tip column had, in the late 90s and for a few months into the new century, been used in a way that had abused the position of trust it held with the public.

Generally, there were shares recommendations in the daily column to readers but behind the “tips” offered were actual dealings by the two journalists in recommended shares; selling out at a profit once the share price had risen.

In all, Hipwell was deemed to have made £41,000 and Bhoyrul £14,000. 

There is also another example. Martha Stewart, a famous American businesswoman, who had become a beacon for women in leadership in the early 2000s hit the headlines for the wrong reason.

She became a subject of speculation and federal investigation due to suspected insider dealing. Stewart sold four thousand shares in a company she was associated with, just a day before the company’s share price plummeted. Many got confused about the “coincidence” of events!

And a third example too! In May 2021, China sent a strong warning to commodity market speculators to desist from “excessive speculation”, announcing a new crackdown on “speculators and hoarders”.

“This round of price increases is the result of multiple factors, including international transmission but also many aspects reflecting over-speculation”, China’s National Development and Reform Commission (NDRC) said in a statement, after a meeting with the country’s main metals producers.

Companies “should not collude with each other to manipulate market prices [or] hoard goods and drive up prices,” NDRC stated in the release, which also pointed out that the activities of the speculators and hoarders was disrupting the normal functioning of the market.

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As I explained in the May 29 edition, “Whenever anyone had tried to manipulate the unseen hand that regulates the market, there was always chaos.

Chaos, in the sense that, direct market manipulation to distort an equilibrium state of order always throws up uncertain pattern of disorder influenced mainly by the interpretation and reaction to the situation by economic agents.”

But there are also market practices that may throw up situations of insider trading which are not quite the same.

Let me use arbitraging within the securities market trading to explain this. Working with an investment banking firm in the UK, l was exposed to how to manage arbitrage positions.

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This was in the late 90s and at the time stock lending and repo transactions dominated market activities, becoming one area where arbitrage was profound. Regardless of the bourse on which securities were listed, they carried equal rights.

Thus, traders will go “short” for example, that is, selling securities that they did not actually own, and may go to different markets to get the stock delivered to the investor/purchaser.

Normally, such transactions may involve a bet on price movement in the future to satisfy the net obligation created.

 However, there are instances that stock loans and repos may form part of a complex mix of arbitraging because the security involved may have different pricing on different markets.

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Don’t even mention the possibility of exchange gains in such transactions also because at the time euro was not dominant in the Zone.

 You may call it a grey area in stock market trading, but these particular complex derivative transactions are not driven by information asymmetry or some kind of insider trading.

Rather, it is a trading strategy that improves market liquidity and increases fees to the trader because the loan situation involves payment of “penalties”, that is fees, and he who is able to take advantage of the mis-pricing is the one who is always “in the money”.

In all, insider trading poses significant challenges to the integrity and effectiveness of market operations. Distorted market operations through insider trading creates unfair advantages to certain market participants, or preferential treatment for connected institutions and individuals, potentially disrupting the level playing field.

To preserve public trust and promote market discipline, market regulators have adopted robust measures to identify, prevent, and manage insider trading. Promoting transparency, establishing ethical guidelines, and implementing strong oversight mechanisms have become part of the measures to control insider trading. The law forbids insider trading, therefore, it must not be encouraged.

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