The Australian stock market has made efforts to beef up its regulation and supervision to curb insider trading. Despite the efforts by the market regulators, it has been in the media that, many directors in the Australian Stock Exchange (ASX) market do not meet the requirements that pertain to the disclosure of their trading within five business days of their transactions. This is a violation of the Corporations Act of 2001 (Brown, Foo, & Watson, 2003). Due to problems of insider trading, it is good to closely examine the reports. Since insider trading can have a great effect on the stock exchange, this report will highlight insider trading in the Australian Stock Market and evaluate the efforts by the Australian Securities as well as Investments Commission in an effort to stem out the practice. Insider trading is defined as the act of buying and/ or selling of shares following the information that is unavailable to the public and other market players (Seyhun, 1986). It is an unfair practice that is prohibited by law. An insider is a person who has access to critical and material information about a company.
Since the collapse of WorldCom, Enron, and other large organizations, most market regulators have increased their efforts to fight insider trading (Brown, Foo, & Watson, 2003). There are many reported instances of insider trading in the Australian Stock Exchange. In February 2010, an associate analyst and Moody’s Investor Services, Daniel Joffe, was accused of giving out insider information acquired during the course of his work to his associate, Nathan Stromer. Out of this information, Nathan bought shares and warrants for companies which were either being taken over or were about to release sensitive information to the stock market. Between 2000 and 2004, a UK Financial Services Authority made a study on the Australian Stock Exchange and found out that, share prices changed even before the release of critical information in the market. In December 2010, John Joseph Hartman was charged and found guilty of insider trading and jailed for three years. He had committed the offenses when he was an employee of Orion Asset Management. Mr. Hartman used his position to advise his friend through a text message to buy and/or sell shares for companies such as Henderson Group, Riverside Mining, Amp, Caltex and others. In 2008, there was an increase of share prices of Austar United Communications Ltd by 18%, four days before the takeover bid by Foxtel was announced. This is a case of insider trading. Newspapers have also been accused of aiding in insider trading. They have been reporting takeovers even before they are officially announced. In Feb 2010, The Australian reported the purchase of Seven Media Group by Australian Newspapers Ltd a day before the initial announcement. The Daily Telegraph also revealed a sale of Riverside Mining Ltd to Rio Tinto Group a day before the official announcement. This is evidence about insider trading in the Australian Stock Exchange (Brown, Foo, & Watson, 2003).
On a stock market, Insider trading negatively impacts investors’ confidence. Insider trading also affects the strong form and semi-strong form of market efficiency (Seyhun, 1986). A strong form of market efficiency is where the price of shares reflects the past, present, and future information of an organization. The semi-strong form is where the share price reflects past and present information only. Experts have argued that, insider trading does not directly affect share prices. They are affected by the fact that the participants in corporate deals cannot keep their mouths shut. Insider trading thus causes changes in share prices even before critical announcements are made which impacts the efficiency of two market forms; the strong and semi-strong markets. Milton Friedman however argued that insider trading improves on the strong and semi-strong form of market efficiency. According to him, insider trading introduces sudden information to the market by buying and/ or selling shares. This view has been condemned since it is unfair to other traders and players in the market (Brown, Foo, & Watson, 2003).
The Australian Securities and Investment Committee (ASIC) have increased its supervision and prosecution of managers and directors found guilty of insider trading. The regulator has also started using measures such as phone tapping, increased penalties, and others. In 2008, the ASIC and the ASX declared that the ASX would closely monitor the names of directors, their trades, and communication with the stock exchange (Brown, Foo, & Watson, 2003). The chairperson of the ASIC, Greg Medcraft, believes that, the ASIC and ASX are now better equipped to fight insider trading. He advised the banks and financial institutions to tighten their self-regulation first. The increased surveillance by the ASIC and the ASX has made discoveries of unusual price movements, which are being investigated. The ASIC has also been working hard to ensure proper auditing practices in the organizations listed in the stock market. It has communicated to organizations that, the directors will be held responsible for improper auditing practices. The ASIC prosecuted the directors of Centro Properties Group for wrongly approving financial statements, which did not disclose the company’s debt (Brown, Foo, & Watson, 2003).
Insider trading has been a rampant problem in most stock exchanges in the world. The notable instances of insider trading have witnessed the fall of big organizations such as WorldCom, Enron and Lehman brothers. Insider trading is not only unfair to investors but it also reduces the confidence the investors have on the stock market. This is the reason why the ASX and the ASIC have increased efforts to fight the practice. The measure taken to reduce insider trading in the Australian stock market are doing good but a lot need to be done. Currently, only 78% of investors in the ASX have confidence with the stock market (Brown, Foo, & Watson, 2003). This needs to be improved.
Brown, P., Foo, M., & Watson, I. (2003). Trading by Insiders in Australia: Evidence on the Profitability of Directors’ Trades. Company and Securities Law Journal, 21(4), 248-261.
Seyhun, H. (1986). Insiders’ Profits, Costs of Trading, and Market Efficiency. Journal of Financial Economics, 16,189-212.