Vigilance the key to stopping insider trading
A string of successful and high-profile prosecutions against insider traders has suddenly put people on their toes. What is surprising, though, is not that there is a new sheriff in town ready to enforce the law but that it has taken him so long to arrive. There is still a prevalent belief among some investors and bosses that white-collar crimes are less serious and that insider trading is a victimless offence. As one professional trader has cynically put it, insider trading is just 'arbitraging our position in the knowledge curve'.
If Hong Kong is to become a truly global financial hub, such attitudes cannot be allowed to persist. Working closely with the Department of Justice, the Securities and Futures Commission is right to step up prosecutions in appropriate cases. That has already helped create the necessary deterrent against a cancerous practice that threatens the heart of any well-functioning financial system.
Many Hong Kong people continue to have a high tolerance and cavalier attitude - even admiration - for those who have access to privileged information and are able to profit from it. Such attitudes partly stem from the way the local stock market has evolved. From their earliest days, stock exchanges were treated like an old boys' networks. Dealing in inside or privileged information was part and parcel of how people built networks, made friends, developed businesses and gained influence.
Hong Kong did not have a tribunal that ruled on insider trading until 1991. Even then, it was dealt with as a civil matter so only fines were imposed. For a long time, the colonial government did not consider insider trading a serious threat to the efficiency and transparency of financial markets. Indeed, insider trading was only criminalised in 2003. But as the economy grows and the size of the stock market expands, Hong Kong has become a major market for international fund managers, investors and financiers. They rightly demand transparency and internationally accepted standards.
Excuses are often made that it is difficult to tell the difference between a hint, hunch, rumour, tip-off and an outright exchange of insider information. In reality, people know when they are trading in privileged, or non-public, information. The difficulty is in proving the distinctions in a court of law. When it becomes a criminal prosecution, the standard of proof is beyond reasonable doubt. That is, rightly, a high threshold. The courts must weigh evidence carefully and be sure before convicting in such cases.
But the difficulty should not deter regulators. Merely imposing a fine, however hefty, may not be enough of a deterrent, as people suspected of insider trading are often wealthy individuals; only the threat of jail is powerful enough to make an impression on them.
Insider trading does enormous damage to markets and investors. It takes away the premiums that legitimate investors should rightfully enjoy from stocks being targeted. Without a level playing field, investors will either demand higher returns for their risks or go elsewhere. Either way, insider trading saps liquidity and pushes up the cost of capital. Everyone loses, except the trader who makes an illegal profit and gets away with it.
Some have argued that more education is needed to raise people's awareness. No one can argue about the need to educate, but nothing is more effective at making people aware than high-profile cases in which criminals have been brought to justice.
Unless we are want to revert to being a financial backwater, regulators must stay vigilant and go after those who threaten to undermine what Hong Kong people have worked hard to achieve.