Analysing the Threats of Inside Trading and Rogue Trading

Published: 2021-09-15 01:50:10
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Category: Corporation, Strategy

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Investopedia defines Inside Trading as, ‘the buying or selling of a security by someone who has access to material non-public information about the security’. Inside Trading can be considered legal when parties such as large shareholders or corporate insiders trade stock within their own companies by reporting their trades to the SEC (Securities and Exchange Commission). However, it is usually associated with illegal conduct since the insider has an unfair advantage in the market, which allows the insider to affect the value of a company’s stocks without the consent of the legal parties. The reasons why inside trading is considered unethical is because it is a violation of fiduciary duty, which means that some people are at a greater disadvantage in trading as the decisions made are hugely impacted. Therefore average investors who have the potentiality to trade will avoid the market. This is in general will cause a decrease in the market’s value and trading activity due to the increased number of inside traders.
For example, the Martha Stewart case in 2003 shows that access to confidential information has an impact on sales decisions shown by Stewart’s sales of nearly 4000 shares of biopharmaceutical company ImClone Systems in 2001, which avoided a loss of nearly $50,000. This sale was only generated following a tip Stewart received from Waksal’s (CEO of ImClone Systems) sale of his shares – which was private information. This resulted in a fall of 16% in shares showing that other shareholders were negatively affected as they received a lower return or experienced a loss. In addition to that, it has a wider impact in the future, as investors will fear unfair treatment so they may demand higher expected returns and this increases the cost of capital for firms, which will reduce new investment and ultimately have a very negative impact on the remaining shareholders and the company. The individuals are encouraged to use an illegal form of insider trading in order to maximise their returns, as their main intent is to be as successful as they can. Although it defeats ethical values, they succeed in monetary terms as they avoid loss and generate a higher gain.The policy that should be learnt from the inside trading is that having an illegal conduct of trading and not declaring it to the SEC is a crime, so this means that they can be jailed and will cause a loss for the firms and people that have invested an enormous amount of money. Furthermore, increasing anti-inside traders will enhance the market values and improve the market activities as a whole. Market Manipulation is considered to be illegal in the US because it creates a false demand for security by distorting prices, limits the number of public shares available to buy and spreads false information about a company for someone else’s gain. The two forms of market manipulation show the reason why it is considered unethical: information-based and transaction-based. Through information-based market manipulation one party tends to persuade the other party that the price of a financial product or security is false and tries to change the price so that the party informing the other benefits from it selling for a lower price. This means that the party is making a loss simply due to false information being given. Through transaction-based market manipulation, the party aims to gain a dominant position in the market and control supply so that prices can be influenced in its favour such as the buying of a large supply of oil.
Therefore, it is considered unethical as it aims to deceive the other investors involved in the market in order to benefit them and they are the victims as they make a smaller return than they could have and this ultimately impacts the markets as there may be dominant figures manipulating the market, which has a negative impact on everyone else involved. People are encouraged to manipulate markets in order to control the investors in terms of sales, so that prices can be changed in their favour to generate a larger profit. The policy that should be learnt from the Market Manipulation transaction is that they are being regularly monitored and if a market manipulation was caused by an individual then this is classified as a serious crime offence (defined by section 118 of FSMA 2000). Thus, causing of the crime means that penalties will be issued and can prohibit them from regaining the employment position within the country. Furthermore, the employees and people should know that even if they attempt to break the market laws, the regulators would still be looking out for them.
Rogue Trading is defined as ‘the practice of trading securities using another person or institution’s money without input or oversight from others’. It usually involves high-risk investments that can produce very big losses. When traders drive for success in this high risk and high-tension world, ethics is overlooked for success. Reasons why rogue trading is considered unethical is because they hide their losses over long period of times by stealth and misrepresentation. Traders begin to use rogue trading due to goals which encourages bad behaviour to achieve monetary success and this behaviour is overlooked for self-interest and self-gain. Furthermore, as it becomes frequent, ethics slowly become irrelevant as success begins to grow. This ultimately becomes unethical as self-interest leads to no consideration about other people’s opinions or money in order to make a gain for yourself.
Due to rogue trading, financial institutions also suffer. For example, Kerviel was a well-known rogue trader who cost Societe Generale (France’s second biggest bank) around $7.1 billion. This therefore it shows has a wider impact on other parties as the bank itself now has a bad image following such a huge loss that had been unknown for a while. Furthermore, employees and customers of this institution suffer as their money had been used in unknown causes without their consent which results in a loss of trust and confidence and that is ultimately a very negative outcome. This is because borrowing from banks will decrease and a decrease in investment affects the economy negatively because there’s likely to be less innovation and decrease in unemployment as jobs tend to not be created. Therefore, the country’s economic system is slightly dented as there’s loss of revenue and investment in various sectors such as infrastructure. People are encouraged to do rogue trading as there’s less risk involved for the person since only the third party’s money is involved, which despite being unethical, there’s a greater reward for the person.

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