Stricter rules combined with better surveillance effectively reduces insider trading but delivers substantially more profits to those who continue to cheat the market, according to a global study of 22 stock exchanges by an Australian research body.
Even the most conservative estimates show that a 23.43% reduction in the number of insider trading cases means a 53.17% increase in average profits per case.
The research from the Capital Markets Cooperative Research Centre (CMCRC) examines the relationship between the frequency and profitability of insider trading and exchange trading rules and surveillance.
It is the first in its kind to look at the exchange trading rules which govern market conduct and relates these rules to insider trading.
“Insider trading can be propagated through many different channels and by many different market participants,” said Michael Aitken, CEO of the CMCRC.
The study found that more detailed rules and wider surveillance significantly reduced the number of cases of insider trading but increased the profits per case.
Aitken said this is consistent with the Becker economic model of crime which suggests one will only commit a crime if the expected benefits exceed the costs.
The research will be presented at the CFA-JCF-Schulich Conference on Financial Market Misconduct next month in Toronto, Canada, a conference sponsored by the CFA Institute, the Journal of Corporate Finance, and the Schulich School of Business.