Insider Trading of Europe Insider Research Paper

  • Length: 8 pages
  • Sources: 8
  • Subject: Business
  • Type: Research Paper
  • Paper: #18801917

Excerpt from Research Paper :

Although permitting access to key corporate information by all employees could generate an insider trading nightmare (Fishman & Hagerty 110).

Possible solutions to the conflict

One question that everyone is asking is; how can this conflict be resolved? A palpable, simple, and stout approach would be returning the choice of insider trading regulation to individual firms. It is difficult to make out an externality that would validate putting this decision into the hand of a regulator. The most reasonable story that can be imagined is that board directors might disregard what is excellent for stakeholders and do just what fits the insiders. If this story was not found to be reasonable then firms could just be allowed to decide how to weigh any costs from daunting investment through unfavourable selection alongside any gains of using prediction markets to advance corporate information and coordination efficiency. This resolution, however coercing, seems politically infeasible for now.

Another comparatively strong approach has been proposed over and over again over the years, this was a requirement for all insiders to preannounce sales stock in their companies. This was a recommendation put forward by a blue-ribbon commission that assembled to address financial indignities and ensuing decline in investor confidence in the year 2003. "The commissions call for insiders to preannounce their sales echoes proposals made over a decade ago in the legal press, law reviews, and the U.S. Congress that would require preannouncement of all trades" (Huddart et al. 1). A common version of this proposal would offer average people much more protection from undesirable selection in trades than contemporary insider trading laws. It would also tolerate individuals and organizations much more suppleness in selecting their information policies, suppleness that they could use to discover decision markets and other fresh decentralized information processes.

The basic proposal would be to categorize traders into ordinary traders and numerous levels of privileged well-informed traders, and only permit trading between levels when the more informed trader has made known his specific planned trade prior. In properly functioning markets, even an hour might be ample of notice. Such a rule would widely do away with undesirable selection between levels, undesirable selection would mostly remain among traders of the similar level. Those who were required to preannounce their trades would find it rather harder to use markets to evade their risks (Huddart et al. 1), but being given the label of a well-informed trader should be much less limiting than being labelled an insider in the existing insider trading rules. Well-informed traders could be allowed to become well informed to the level of their desire and to reveal information discerningly to others within their level thus there will be far less necessity for rules on disclosure (Gupta 227).

In this proposal, well-informed traders would have the choice of forming their own unique markets to trade with one another, or to flag offers in a common market outside their level, and even to caution traders with lesser information. A 'well-informed traders' label could be practical not only to corporate insiders, but also to the well-informed outsiders such as hedge funds among others. It appears that there are a number of approaches that could agree to the wide use of prediction markets within firms that also keep average people from suffering bungling undesirable selection in stock trades, however, the status quo insider trading regulations are not favourable to any of such approaches.

Conclusion

There have been a lot of arguments from legal scholars and economists suggesting that laws illegalizing insider trading should be repealed with claims that the insider trading dependent on non-public information benefits investors, in general, through the quick introduction of fresh information into the market. Some of them believed that the trader had no obligation to make the public aware of his trade. From whatever angle this debate is looked at, its still widely acceptable that insider trading is not a perfect trend but a better one. Even though there are a number of conflicts that are related to insider trading, a number of resolutions have been proposed and when properly applied will work to the benefit of both the traders and the ordinary people.

The other concern about insider trading is the directive on regulation, as indicated in the beginning, the E.U. insider trading directive is profoundly predisposed by United Sates securities laws, however, when compared it is found that there is a clearer definition of some terms and consequences in E.U. law. Another interesting point to note is that insider trading was regarded as right in many European countries until the introduction of the directive which is one of the success stories in the implementation of United States' capital market system overseas. Therefore, the insider trading in Europe encompasses a lot of directives at the moment which has led to a number of distinct views as to the legality of the practice.

References

Brandenburger, a. & B. Polak. "When managers cover their posteriors: Making the Hanson, R. "Decision markets." IEEE Intelligent Systems 14(3) (1999):16 -- 19.

Hatter, a. And E. Trapasso. Managers say the majority of information obtained for their work is useless, Accenture survey finds. 2007. 11 March, 2010. .

Huddart, S.J., et al. Pre-announcement of insiders' trades. 28 June, 2004. 11 March, 2010.

http://ssrn.com/abstract=216168.

Fishman, M.J. & Hagerty, K.M. "Insider Trading and the Efficiency of Stock Prices." Rand

Journal of Economics, 23 (1992): 106-122.

Gupta, a. & Misra, L. "Public Information and Pre-Announcement Trading in Takeover Stocks." Journal of Economics and Business, 41(1989):225-233.

Sunstein, C.R. Infotopia: How many minds produce knowledge. Oxford University Press, 2006. Surowiecki, J. The wisdom of crowds. Doubleday. 2004

Tridimas, Takis. "Insider Trading: European Harmonisation and National Law Reform."

International & Comparative…

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