INSIDER TRADING is a problem in most financial markets. Many jurisdictions have strict laws and enforcement measures against insider trading. This column discusses recent empirical research published by the author and Dr Zhang Yang of Wuhan University School of Law on insider trading administrative enforcement by the China Securities Regulatory Commission (CSRC) for the two decades between 1999 and 2019.
WHAT IS INSIDER TRADING?
In simple terms, insider trading is the trading of a listed company’s securities by individuals with access to confidential or material non-public information about the company. The range of “insiders” who might engage in insider trading is broad and includes directors, executives, and their relatives and friends. The range of information involved is also broad, including information about a company’s proposed acquisition or disposal of an asset, and also information about the company’s operations generally.
A typical example of insider trading is where an insider obtains information about the proposed takeover of a listed company and acquires shares in the company in anticipation of an increase in the value of the shares as a result of the takeover bid.
Debate is ongoing in academic and other literature about whether insider trading should be illegal. There are a number of reasons that are commonly identified for prohibiting insider trading, including that it is unfair, as investors with insider information could potentially make larger profits than other investors. In addition, insider trading increases the costs of issuing shares or bonds by companies, as investors will demand a higher return to compensate for disadvantage they suffer as a result of not having equal access to material information about the company. All of this undermines public confidence in financial markets.
At the same time, as shown by findings from the empirical research, there is no guarantee that people who engage in insider trading will generate large profits from their activities. In some cases, they actually suffer significant losses.
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This column draws on an article by Zhang Yang and Andrew Godwin titled Administrative Enforcement of Insider Trading in China: An Empirical Study (2022), in Company and Securities Law Journal.
Andrew Godwin previously practised as a foreign lawyer in Shanghai (1996-2006) before returning to his alma mater, Melbourne Law School in Australia, to teach and research law (2006-2021). Andrew is currently Principal Fellow (Honorary) at the Asian Law Centre, Melbourne Law School, and a consultant to various organisations, including Linklaters, the Australian Law Reform Commission and the World Bank.