Takeovers 'breeding ground' for insider trading

According to the Financial Services Authority’s
Measure
of UK market cleanliness report, just 2% of significant announcements were
preceded by informed price movements – this compares with 11.1% during 2002/03,
and 19.6% between 1998 and 2000.

The introduction of the Financial Services and Markets Act in 2001
significantly reduced the scope of market abuse, according to the research.
There were 51 major announcements, 10 of which involved ‘informed price
movement’, during the period before the FSMA was introduced. This had reduced to
six in 54 in the year immediately after the Act was introduced. By 2004/05,
after enforcement of the Act had came into force, however, this had dropped even
further to one incident in a total of 49 announcements.

Significant takeover announcements, however, are still a breeding ground for
insider trading with abuse suspected to have taken place in 23.7% of major
takeovers. This had peaked at 32.4% in 2004, but is still hovering around 2000
levels – before the FSMA was introduced.

“We are pleased to see the improving trend in market cleanliness with the
addition of the 2005 data,” said Sally Dewar, director of the FSA’s markets
division. “However, the figures for takeover announcements, although moving in
the right direction, remain a cause for particular concern and there will be no
let up in our efforts to tackle the problems in this area.

While the study does have its limitations – it only focuses on insider
trading, which is only one form of market abuse, and it only considers cash
equities, rather than derivatives or other instruments – the study offers a
fascinating view of the level of corruption in our public markets.

“These results reinforce the importance of our ongoing work on market abuse
and, in particular, our current review into the handling of inside information
in mergers and acquisitions,” said Dewar.

The research is an updated version of a similar study published in March
2006. There have been three major changes: the dataset has been extended to
include 2005; the methodology has been altered to reduce false-negatives; and
finally, it analysed trading volumes ahead of announcements.