Fabric of society safe from insider trading
FOR THE PURPOSE of clearing the air with the , let me declare myself. I am not a strong supporter of laws against insider dealing and front-running of client orders.
This is not to say that I think it proper conduct for brokers and bankers. It is just that I think these offences (I hesitate to use the word 'crimes') do no great damage to the fabric of society, that laws against them never work well and that the market exacts its own penalties on those who engage in them.
Let me also make the distinction with fraud, and here I have no hesitation in using the word 'crime'. Company directors and others involved in the investment business who utter straight lies above their signatures get everything they deserve if they are caught and punished for it.
But this is a different thing from insider dealing. Laws against fraud existed before anyone even thought of making insider dealing an offence and a body such as the SFC is not really needed to deal with it. It is a police matter and, if we think there is too much fraud going on, the solution is to beef up the budget for the police fraud squad.
I do not expect to find many people agreeing with me. The general notion is that insider dealing does wreak a great deal of damage because it destroys trust in a market and brings market workings to a halt.
I suppose it can but I would like to see harder evidence that it ever has. I have spent many years around dealing rooms and let me assure you that the market thirsts for inside information. Brokers invariably oblige with talk that masquerades as such. Tell your client that you have the real goods and you will draw him in, not push him away.
But participants in a market recognise the danger of real insider dealing full well.
If you want to know why some stocks (and I shall not name names) perennially trade at deep discounts from what everyone regards as fair value, you can take it as a good starting point that the market thinks the insiders have a habit of taking advantage of their positions.
This costs them billions in a lower share price and a reluctance by the market to take any new offering from them. The regulation route against insider dealing costs them only millions at most.
I regard the natural market defence against insider dealing as the much more effective of the two, as it has always been. It has the further effect of keeping a stock market small until its participants have grown up enough to recognise their obligations to others (hello there, Shanghai).
Let us also face one unwelcome fact about the regulation route. It only maintains rule of law if some basics of the rule of law are undermined. It has few chances of securing convictions if the burden of proof is placed on the regulators. The trend therefore has been to place the burden of proof on the defendants. We are steadily heading to a system of guilty until proven innocent. I prefer my rule of law the old-fashioned way.
Yes, insider dealing is unfair to investors who are not insiders. And now, who ever claimed that the market operates on the same moral plane as a kindergarten class? You put down your money and you take your chances. Start thinking law of the jungle, not law of the church. If you do not like it, then reach for the Sell slip and put your money on deposit with a bank instead.
So here is the punch line. The SFC now wants licensed investment analysts to declare their interests if they tout stocks as tipsters for newspapers. Yes, it is fair. They ought to disclose their motives if they or their employers have first loaded up on stocks they promote.
But what we will get here is just another mountain of small print in disclaimer clauses and I doubt very much real headway against people talking their own book. Let the newspapers themselves beware. If they get a reputation for deceiving their readers, then their sales will suffer.
And if the readers still prefer the hot gossip, however much they distrust it, then so be it. Fools and their money will soon be parted. We have as much chance of changing this fact of nature as we of have making water flow uphill through legislation.
But in one way life would certainly be easier for me if this new proposal were adopted and I still had my dealer's licence (I had to give it up when I left the trade).
All I would need to do is open this column with two words - 'Buy 'Utch' - and I could then fill the rest of the space with fine print telling you that I may or may not own or have owned shares of Hutchison Whampoa and I may or may not be engaged or have been engaged in dealings for the company and anyway I take no responsibility for it and it is all your own fault if Hutch goes down.
Yes, boss, sign me up. I like the thought of finishing my working day by 9am.