Inside story always highly prized
There is a story, perhaps apocryphal, of an eminent London broker who in the 1970s was called to present his views on nefarious practices in the securities industry to a parliamentary inquiry.
'What do you think of inside information?' asked one of the Labour members who dominated the panel.
'We prize it highly. Our clients find it most useful,' the stockbroker replied.
Of course they did. And before sucking in your breath in disapproval it may be a good idea to review carefully some of the conversations you have held with your stockbroker.
Has he ever told you something along the lines of 'look, this goes no further just now but take it as the genuine goods from me, sunshine, that some people in the know who I had dinner with last night say Li Ka-shing and the Kwok brothers are about to. . .' Honestly now, did you never hear something like this from your stockbroker or, when you heard it, did you never say 'tell me more'? You never did? And you swear that you have truly dealt in stocks? Well, that's a puzzler, that is, because if it were not for purported inside information plus a lot of twaddle about support levels and momentum indicators many dealing rooms in this town would be quieter than a country park hillside.
Fortunately for crusaders against insider trading almost all this sort of dealing room talk is uninformed rumour that serves only to make you deal quickly, often and in size.
But whether it is the real goods or not, the point is that stockbrokers would not engage in it if they did not think their clients had ready ears for it, which should tell you that many people do not really think inside information quite as reprehensible as they may say they do.
We now have authorities in the mainland introducing tough new laws on insider dealing with 10-year jail sentences and big fines for offenders as well as heavy penalties for disrupting markets, faking transactions and releasing false information.
All well and good but the difficulty is that in matters of good practice, a stock market can lead the society on which it depends by only a small margin of moral principle.
If you want US-style regulatory practices in a country where most people are not ready for them and where they would really prefer the good old shark-eat-shark style of playing the market then all you will do is create a new class of criminals.
Law alone won't stop them. You first need the domestic investment community at large to frown on the practices that you have made illegal. Until it does you won't achieve much.
Of course it is also possible that the new legislation is mostly a public relations exercise to give mainland markets a better international reputation.
But if Beijing is serious about reforming mainland markets, it should have chosen another starting point.
The best way to stop misuse of inside information is to bring it out into daylight. It has always been far more effective to require that price sensitive information be made public as soon as possible than to enact laws aimed at keeping it secret.
It is clearly not happening at the moment. When a Ministry of Finance audit shows about 90 per cent of state-owned enterprises have lied about their profits you know that they have so long got away with it because they generally operate under such lax and little enforced reporting requirements.
And this is to a large extent a cultural problem in a society that still officially regards much commercial information state secret.
It may help to sharpen company law and bring in full international accounting standards.
These sorts of changes should in fact come before new draconian legislation on sharp practices.
But none of it will really work well as long as investors set much greater store by hot tips.