The complicity of the government, its regulators and the Australian Stock Exchange (ASX) in facilitating insider trading was highlighted in a report by the BT Financial Group released on November 11. Directors in over 60 per cent of the largest 200 ASX companies failed to report their share trading as required.
In the era of Henry Thornton, share trading was carried out in coffee houses. Share buyers and sellers met face to face and so were known to each other before they traded.
Such “sunlight” share trading is not possible today. Insiders, like company directors, managers, investment bankers, advisers and others can now buy and sell shares anonymously through brokers. Before governments licenced the operations of stock exchanges, brokers made the rules for share trading to suit their own private interests.
The rules for trading shares anonymously were made by brokers. It allowed brokers to secretly take advantage of their clients by buying or selling ahead of their clients who had inside information. The law now requires financial advisers to know their clients so this places brokers in a privileged position of knowing if their clients have inside information.
The fact that covert share trading has been universally adopted throughout the world does not make it ethical or right. Nor does it make markets efficient in the sense of effectively informing market participants on how to efficiently allocate funds between competing opportunities. Neither does it allow market operations to be monitored on an effective or efficient basis.
Monitoring cannot be effective as insiders can hide their identity. Monitoring cannot be efficient as considerable resources are required in carrying out surveillance, investigation and taking legal action. Sunlight trading would introduce a self-enforcement regime as any person with inside information would need to disclose that they were insiders. The veracity of any claim by a share trader that they were not insiders would be exposed to all market players.
If an insider did not declare themselves, then the chances of someone, somewhere, at some time, discovering they were insiders would be considerable. Other traders would have a personal incentive to discover any duplicity and take legal action for restitution of any loss they might have suffered from non disclosure. Instead, with the current covert share trading regime, monitoring is carried out by a computer and or officials watching anonymous trades with no personal financial investment in the outcome of their work and very little exposure to the identify of market participants.
Not withstanding that, the ASX requires share trading being initiated on a covert basis by insiders and or brokers: officials of the ASX have the chutzpah to claim that they operate a fair and transparent market place. The BT report provides evidence that such statements represent false and misleading conduct.
The federal treasurer has expressed concerned over the secrecy of Swiss banks hiding insider trading by Australians. It is the treasurer not the Swiss banks that create the problem in allowing the ASX to keep secret the identity of those trading shares. A fundamental rule in business is to know with whom you are dealing. If the treasurer and the government wanted to protect a majority of their constituents they would require the ASX to adopt sunlight trading. Their failure to do so illustrates how captive they and their advisers are to minority insider interests.
It is hypocritical for Australian regulators to require companies to continuously disclose any price sensitive information yet not also to require continuous disclosure of who is trading shares. The identity of who is trading shares can also be price-sensitive information.
If large institutional investors object to sunlight trading because they believe that this would put them at a disadvantage, then they are proving the point that the identity of who is trading is price sensitive information.
If investors do not wish to reveal their identity then they should invest only in privately held assets. The privilege of investing publicly and obtaining liquidity should carry with it the obligation for participants to disclosure the identity of all those involved in the ownership and or control of the shares traded.
His submission to the Australian Senate Inquiry into “The framework of the market supervision of Australia's stock exchanges” of February 5, 2001 is posted here. This article was first published on Henry Thornton on November 16, 2005.
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