Greater controls on insider trading are increasing the average profitability of the practice, but are helping reduce the number of incidents, according to new research.
Sydney-based consultancy Capital Markets Cooperative Research Centre (CMCRC) studied the relationship between tighter rules and surveillance to tackle insider trading and the extent and profitability of breaches.
It found that improvements in the specificity of trading rules resulted in a 23.43% fall in the number of insider trading cases occurring. However, the reduced number of cases also resulted in higher profits for remaining insider trading deals of 53.17% on average.
Michael Aitken, CEO of CMCRC and co-author of the research, suggested that rules alone are not enough to mitigate insider trading and a coordinated approach utilising both rules and surveillance was needed.
“Insider trading can be propagated through many different channels and by many different market participants,” he said. “And because of its broad nature, the rules prohibiting insider trading alone may not yield as great an influence on insider trading as the combination of the overall rule structure of the exchange and its domestic and cross-market surveillance.”
One possible reason for this is that, while the scope of rules is widely known by market participants, surveillance activity remains largely unknown, making it difficult for criminals to quantify whether the potential profitability of insider trading outweighs the risk of being caught.
CMCRC studied monthly data from 22 exchanges in 17 different countries across Europe, North America and Asia from January 2003 to June 2011.