Some critics claim that insider dealing actually benefits market efficiency. White argues that, “in the absence of immediate and complete disclosure…insider dealing can contribute to efficiency by causing the market price to move towards what the price securities would command if the inside information were publicly available.”16 Insider dealing moves the market in the right direction, reflecting the true value of a company at any given time. Brazier notes, “In essence, those economists are saying that a securities market with active insiders ensures accuracy in the pricing of the securities so traded.”
Professor Manne18 purports insider dealing would avoid sudden and detrimental surges in market prices that are the result of knee jerk reactions to public announcements of price sensitive information. Steady adjustments in share prices are more desirable which could be achieved by gradual dissemination of information. Similarly, if individuals close to a company were allowed to act on their privileged data, markets would react to their buying and selling thus creating a more natural ebb and flow of share prices. According to White the problem with this theory is that, “trading may take place in too small a quantity to affect the market price, and because insiders camouflage their activity, making observation difficult.”19
Economists also put forward the argument that insider dealing is essentially a ‘victimless crime’. Acquisitions are usually made through an intermediary today so it is be difficult to make a direct connection between the individual benefiting from the information and the unsuspecting party who pays more or receives less. Alcock comments, “the insiders gain is not really made at the expense of the party he trades with since this other party has already come on to the market as a willing buyer or seller at the prevailing market price. If he had not dealt with the insider it is likely he would have dealt with someone else on exactly the same terms.”
As a financial crime, it may not attract the immediate moral outrage of a violent crime against a person but it is not possible to say that it is completely victimless. If investors form the opinion that they cannot trust the market and that people are habitually stealing a march on them, the health of the financial industry, of which we are all in one way or another dependent, will suffer. The theory is that insider dealing will alienate investors with harmful results for society as a whole. McVea comments, “…despite the fact that difficulties in harm are evident, it is not necessary to establish loss or injury to an individual or specified group; it is enough that harms (losses) are sustained which society thinks, in the absence of any compelling justification to do otherwise, ought to be prohibited.”
In conclusion, although there are arguments for allowing insider dealing, it is almost universally accepted that regulation is needed. The most important question to ask with regards the stock market is does it provide investors with an equal opportunity to use their skills, experience and judgment to share in potential rewards and to assess risks fairly? Insider dealing distorts the relationship between risk and reward.
The insider dealer takes no risk – he places a one way bet. Prices should reflect supply and demand based on the best possible information being available to all. If some have more information than others do the use of skill and judgment will be overridden by those who are “cheating”. Regulations allow for the provision of a level playing field meaning that some, not all, of the more obvious physical obstacles facing one side will also be faced by the other. McVea comments, “Share prices should reflect all available information and so provide reliable signals upon which investment decisions can be made.”
Promotion of an efficient, orderly and fair market is essential to maintain investor confidence and according to Ashe, “for an effective market in securities every measure should be taken to ensure that the market runs smoothly and that to a large extent depends on investor confidence.”23 In other words investor confidence and market efficiency are inextricably linked; one does not exist without the other.
The question of the effectiveness of current regulation is put into doubt by recent examples of sharp rises in the share prices of Hanson plc and Reuters Group plc immediately before the announcement of takeover offers, indicating that leaks of inside information had probably occurred. There appears to be little fear among dealers intent on using inside information for their own benefit and their methods of implementation and obfuscation are becoming ever more resourceful. This can only compound the problems faced by the FSA in successfully bringing an action. It would appear that insider dealing will always occur in some shape or form and that it is almost impossible to eradicate it entirely.
Alcock, A 1994 Insider Dealing-How did we get there? Company Law 1994, 15(3)
Ashe, M 1992 The Directive on Insider Dealing Company Law 1992, 13(1)
Brazier, G 1996 Insider Dealing: Law and Regulation, London: Cavendish Publishing
Dignam A & Lowry J, 2006 Company Law (4th Ed) Oxford: Oxford University Press