Inside out

Andrew P. Kakabadse, Nada K. Kakabadse and Antje Kaspurz explore the issue of criminality in insider trading

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Is insider trading the high crime that we have been led to believe? Andrew P. Kakabadse, Nada K. Kakabadse and Antje Kaspurz interviewed more than four dozen members of three international exchanges. What their survey revealed, and what they concluded, may come as a surprise.

The past decade of scandals involving Enron, WorldCom, Parmalat and Martha Stewart – and the consequent shareholder mistrust of board members, traders and investment banks – has increased awareness of insider trading.

There are many views on insider trading and what to do about it; but we conclude – after extensive research and interviews – that insider trading is an insignificant consideration when comparing the volume of shares traded and the level of insider knowledge utilised. The issue is not insider trading, but rather how traders can become better informed so as to enhance their trading capacity.

What is insider trading? Generally the term is understood as the buying and selling of securities on the basis of non-public, or privileged, information. Information is material that a reasonable investor is likely to consider as significant in making an investment decision, material that, in turn, may have a substantial impact on the market price of a company’s securities.

Non-public information refers to information that has not been disclosed to the marketplace and investors have not had the opportunity to consider. To become public, information must be disseminated so that it is reasonably available to a broad array of investors. The disclosure of information by a corporate insider to a select group (for example, analysts) is not sufficient to make that information public. We felt a deeper study was needed to explore the wider dimensions of insider trading.

The data for this study was collected at three different sites, the Vienna (VSE), London (LSE) and New York (NYSE) Stock Exchanges during late 2004 and early to mid-2005. The data was exclusively qualitative in nature using 54 semistructured interviews, each lasting about one hour. Each of the study participants represented registered financial institutions.

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