RESEARCH SCIENTIST BRINGS INSIGHTS INTO INSIDER TRADING
Law enforcement and prosecutions are required for regulation to improve market integrity (the extent to which investors engage in prohibited trading behaviour).Law enforcement and prosecutions are required for regulation to improve market integrity (the extent to which investors engage in prohibited trading behaviour). A new breed of researchers is emerging in finance who do not just think up theoretical models to explain financial markets, they interrogate data and report on what it reveals from trading in the real world. Dr Jacob Chan is one of these and he has just published an analysis of insider trading on the Hong Kong market in the wake of new regulations implemented in 2003. Chan analysed the impact of the implementation of the Securities and Fu- tures Ordinance (SFO) on 1 April 2003 and in particular he looked at the likely inci- dence of insider trading in the wake of the SFO regulations. The SFO consolidated and replaced ten previous ordinances that regulated the securities and futures market in Hong Kong. In particular, it introduced a number of new regulatory initiatives such as a dual criminal and civil regime for market misconduct (which increased the powers of inspection and investigation of the Se- curities and Futures Commission), increased disclosure obligations for substantial shareholders in listed firms and established the Market Misconduct Tribunal. Chan had access to a very large data set as well as the capacity to interrogate it and interpret the results through the infrastructure of a world-leading research organisation, the CMCRC. He tested the hypothesis that the introduction of the SFO in 2003 and the start of the first criminal prosecution in 2008 have significantly re- duced the level of information leakage (insider trading) at the Hong Kong stock exchange. The results of his analysis support the hypothesis and demonstrate that market integrity improved greatly in both 2005 and 2008 when the first prosecution under the new ordinance was made public. This supports previous findings that law enforcement, rather than existence of rules alone, is required for regulation to improve market integrity. His work also provides insights into the high rates of ownership and control by closed networks such as families on insider trading. Interestingly the ownership structure of the Hong Kong market companies is heavily skewed towards such family groups and Chan examined whether there existed a ‘small firm effect’ that would see such trading concentrated in stocks with less liquidity.