Fair rules needed to tackle insider trading
There has long been a perception in Hong Kong that trading in stocks and shares on the basis of inside information is an acceptable way to make money - and one which will be tolerated by the authorities. This has persisted even though insider dealing was made a criminal offence in 2003 and there was a crackdown by the Securities and Futures Commission. The regulator now takes serious cases to the higher courts and a string of offenders have been jailed in the past year. But a study conducted by this newspaper suggests that those cases are just the tip of the iceberg.
Research into stock price movements of 20 listed companies in the two days before they made important public announcements revealed big swings in the share price. The ones that increased jumped an average 7.7 per cent in the two days before trading in the shares was suspended, compared with a corresponding 1.9 per cent gain in the Hang Seng Index. The figures suggest that price-sensitive information, which should be kept confidential before a company's announcement, is being leaked and used as a basis for buying or selling shares by those in the know. It is a troubling state of affairs.
Hong Kong's market is, however, certainly not unique in registering sharp price movements before company announcements. Research carried out in Britain, Canada and the US has reached similar findings. When a company announcement is to be made there are, necessarily, a number of people who will be informed. They include directors, lawyers and employees. Even if they keep details confidential, news may well leak out. That alone could be enough to prompt investors to act.
Clearly there is a risk of insider dealing if information is leaked. Listed companies have to take care to keep price-sensitive information confidential until an announcement is made - and to ensure that the process is not unduly delayed. This is one important means of preventing insider dealing and re-enforcing the message that it must not be tolerated.
The government is due to launch a consultation on giving statutory backing to rules on disclosure. It last tried to do this in 2004, but failed in the face of opposition, notably from listed companies. This time, it must succeed. The rules put in place must be fair.
They must not place an undue burden on companies. Nor must they leave directors open to prosecution for decisions made in innocence. At the same time, however, the rules must act as a real deterrent to those who allow information to leak, or do not make it public when they should. The rules must be clear enough to ensure that everyone knows where they stand.
Some argue that insider trading is a victimless crime. Yet a person who unwittingly buys shares from an insider who knows of pending poor results is no different from, say, a homebuyer who purchases a flat from a planning official who knows the block is going to be demolished. In both cases a person is exploiting a position of advantage to prey on a member of the public.
Regulators must be vigilant. The SFC investigates a surprisingly high 4,000 cases of suspicious stock price movements each year. But gathering the evidence for insider dealing prosecutions is not easy and convictions are relatively rare. That is why better regulation is needed of the way companies control their confidential information. The government should release carefully thought-out proposals for rules with statutory backing - and then secure the necessary support for new laws.