Commonor Widespread Practice
Thecountry of focus in this essay is the United States. The subject ofdiscussion is insider trading. Insider trading is the act of tradinga company’s stock and other marketable securities by people whohave access to information not supposed to be in the public domain(Jaffe 410). The fact that they have access to non-public informationgives them undue advantage over other potential investors who maywant to have a stake in the company. The Securities ExchangeCommission (SEC) is in-charge of investigations and filing forlitigations against persons found to be engaging in insider trading.Thus, people who have access to inside information about a corporateentity are excluded by the law to trade its stock or any othersecurities (413). Although the SEC works hard to keep insider tradersfrom the corporate scene, the problem is widespread on Wall Street.The scope and magnitude of insider trading is deep and there is morethat meets the eye. This is information is based on the experiencesof a private investigator interested in understanding how the problemof insider trading is widespread despite efforts by the SEC to deterpeople from engaging in it. From independent findings ofinvestigations and collaborations with SEC and the Federal Bureau ofInvestigation (FBI), the experienced investigator can comfortablyreport that insider trading is widespread from Wall Street and otherplaces on the American corporate scene.
Therehave been many cases where stocks have risen and fallen in scales andproportions that are outrightly unusual. The unusual rise and fall ofstocks usually attracts the attention of investors on the possibilityof insiders benefiting through having prior information. The callsfor investigators to probe the possibility of insider trading areusually a reactionary response. As usual, nothing goes on to responddue to the common belief that it is a huge challenge to find evidenceabout insider trading. The regulators then take advantage of such apublic assumption to sit back and leave everything as it is. Once thedust settles, it is business as usual. Consequently, the laxity andthe resignation of the public and regulators to prevent insidertrading provides conditions for its entrenchment in modern America.The forgotten incidence of usual stock rises or falls are onlyremembered upon another occurrence, but still nothing happens. Veryfew people have been asked to account for the occurrences.
Theinvestigator confirms, through interactions with market observers,that insider trading is fairly common. In fact one of the activeparticipants on Wall Street confirmed on one of his conversationswith the investigator that, “it happens all the time.” Thus, itis so widespread that one cannot pinpoint where it is ore prevalentit is all over the stock trading markets in the United States. Arigorous statistical analysis by three professors in matters offinancial markets and securities markets attempted to give arationale for increased cases of insider trading that are yet to beunraveled to the public. An analysis of their paper, which theycalled Informed OptionsTrading Prior To M&A Announcements,shows startling indications of widespread insider trading. The threeprofessors, Augustin, Brenner, and Subrahmanyam took thirty daysexamining the options market before announcements of differentmergers and acquisitions (M & A) (Augustin, Brenner, Subrahmanyam17). The professors’ findings indicate that about twenty fivepercent of stock deals between merging firms and prospective stockholders involved a significant degree of insider trading. Otherfindings from the professors’ research that points to thepossibility of insider trading are: (1) the SEC only managed toindict 4.7 percent of all the deals that involved mergers andacquisitions. In total deals involving M&A were 1,859 (18). (2)On average, proceeds from insider trading amounts $1.6 million (19).(3) An average insider is able to trade for an average of 16 daysbefore the formal announcement of an M&A deal (19). (4) Theaverage time that it takes the SEC to announce insider tradinglitigations is 2 years (21).
Theabove findings cannot happen by chance. The society seems to havegiven the fight against insider trading due to the huge burden ofproof. Claims of insider trading are actually overshadowed by a busystock market with favorable interest rates. Huge corporations targetin small firms for takeovers by reassuring them of growth potentialand a leveraged market presence (Leland 861). A market filled with amyriad of rights issues and placements, and other deals such asagreements that guarantee partners of a profitable future are therequisites for the massive cases of insider trading that have becomequite difficult to prove for any successful litigation (863).
Inconclusion, the observations of the investigator are concordant withthe findings of other researchers such as the professors mentionedabove. Although insider trading is illegal and attracts very heavypenalties from the regulator, it is still widespread across U.S.securities exchange markets. Some of the reasons responsible forthis market phenomenon are the huge burden of proof, the slow pace ofresponse from regulators, and the a market that becomes overlyexcited by stock market movements rather than checking malpractices.The assertions of these findings are not further from the truth andthe regulator has a lot at stake.
Augustin,Patrick, Menachem Brenner, and Marti G. Subrahmanyam. "Informedoptions trading prior to M&A announcements: Insider trading?."Availableat SSRN 2441606(2014).http://pages.stern.nyu.edu/~msubrahm/papers/M%26A_February%202014.pdf
Jaffe,Jeffrey F. "Special information and insider trading."Journalof business(1974): 410-428.
Leland,Hayne E. "Insider trading: Should it be prohibited?."Journalof Political Economy(1992): 859-887.http://www.jstor.org/discover/10.2307/2138691?sid=21106381070703&uid=4&uid=2