Whilst sitting in the physio this morning I saw an item scroll across the bottom of the TV that was on stating that academics had found that insider trading among Australian company directors was rampant. Whenever academics claim to have found anything to do with markets I have to go and investigate because it is bound to be hilarious. So what did our intrepid eggheads find?
The lead researcher Dean Katselas said “I find that there is significant buying pressure by directors following bad news, and I find there is a lot of selling pressure following good news,”
In case you are not familiar with the definition of insider trading the correct definition is as follows –
Australian insider trading laws prohibit a person from trading in securities whilst in possession of non-public, price-sensitive information. One of the essential elements of the insider trading offence is that the alleged insider must possess certain ‘inside information’. If the alleged insider trader is a company, how does that company ‘possess’ information? Must there be ‘knowledge’ or ‘awareness’ of the inside information, or is mere physical possession sufficient? The Corporations Act contains deeming provisions which impute certain knowledge of a company’s officers and directors to the company itself. General corporate law principles of agency may also apply to deem certain information to be within a company’s possession. How do these provisions and principles operate in the context of insider trading? Legal complexities associated with all of these issues will be examined in this article.
The short version is that you have to be in possession of information that is not available to the general public. Buying or selling shares after the release of information to the public is not insider trading. Most if not all listed companies have prohibitions on the window during which shares can be bought or sold by employees, directors and associated entities. For example, a director or employee may not be able to take any action in the stock until three days after the release of information to the public. Such a clause allows for information to be digested by the market and priced in. The definition of insider trading by the academics in question is not used in any jurisdiction I know of nor would it hold water in a court because of this. What has been described in this paper is simply selling into strength and buying into weakness it is a tactic used by position traders for generations. Insider trading does undoubtedly take place but it would not be picked up by any academic.
The conspiracy theorists out there will latch on to this and draw the wrong conclusion as they are apt to. Despite this, it does reinforce the view that when it comes to markets academics are best ignored.