In India u can fight for Poverty or can try to stop Corruption…….But u can’t stop INSIDER TRADING-It’s our Challenge

Insider trading is a fluid concept. Until 1980, the practice was not illegal in the UK. Prior to then, tipping off favoured clients about market-sensitive company information was a stockbroker’s job description, rather than an illegal activity. Times have changed and so has the pace of financial markets.

In 2009, Samantha Bee, one of the cast members on The Daily Show, the satirical US television programme, said that “if I know about a stock’s activity the day before, it’s called insider trading. But if I know about a stock’s activity one second before, it’s called high-frequency trading.”

Now, however, Eric Schneiderman, the New York attorney-general, is waging war on what he calls “insider trading 2.0”. He is taking aim at the precise time sensitive information is delivered electronically.

Mr Schneiderman’s office is currently investigating the market data industry. In July, under pressure from Mr Schneiderman, Thomson Reuters suspended its practice of releasing consumer survey data from the University of Michigan (UoM) two seconds earlier to high-frequency trading clients who paid an additional fee. Clients paying for Thomson Reuters’ financial information terminals will continue to receive the data five minutes ahead of the general public, who have to make do with a press release.

Speaking at a conference in late September, Mr Schneiderman said that high-speed electronic trading combined with early access to market data gave a small group of investors an unfair advantage. The attorney-general may well be right; following Reuters’ decision, trading volumes in the two seconds before the release of the UoM data dropped sharply. However, it is inconsistent that it is acceptable to be a fee-paying client and receive data five minutes earlier than the general public, but receiving it five minutes and two seconds early confers an unfair advantage.

In today’s electronic markets, two seconds is an eternity. The Federal Reserve is looking into claims that some traders obtained early access to September’s Federal Open Market Committee decision on monetary policy. After the FOMC unexpectedly decided not to alter the pace of its monthly bond purchases, asset prices reacted instantly. According to Nanex, a market research firm, asset prices moved at exactly 2pm in both New York and Chicago after the announcement, when it should have taken 5 to 7 milliseconds for the data to travel from Washington, where it was released.

The lack of delay suggests some news organisations moved information, which they had received under embargo, internally to allow its simultaneous release at the designated time. It is not clear whether using the data within a media organisation in this way breaks the rules of the Fed embargo, but again it raises the question of consistency.

If an electronic platform based in Washington has a tiny advantage over one in New York or Chicago, it would in fact be fairer for all investors if market-sensitive information were moved internally under embargo to allow it to be released at exactly the same time in different centres.

Mr Schneiderman is not only concerned with milliseconds. Following in the footsteps of other US authorities, he has said his office will look into the early release of analysts’ research. At the start of October, Citigroup was fined $30m by the Massachusetts Securities Division for passing on an unpublished piece of research to a few valued clients, giving them the opportunity to profit from weaker sales of Apple’s iPhone before other investors. This case appears to be fairly clear cut, with the analyst in question sharing his conclusions with a few clients before publishing them in a written note.

It does, however, raise the issue that, to fall foul of the law, recipients of inside information have to trade based on that knowledge.

In the Apple example, if the investors receiving the inside information had intended to purchase the stock, but decided not to on the basis of what they learned, they would have gained an advantage over other investors. Not buying is as much a trading decision as selling, but cannot be proven. This is one inconsistency that it would be impossible to remove.

In principle, the pursuit of a level playing field in the dissemination of market-sensitive information is laudable. In practice, the field will never be entirely level and the authorities’ efforts to flatten it are not always consistent.

What is clear is the trend towards more aggressive pursuit of financial misconduct, whether it is insider dealing or mis-selling, which investors can expect to continue for the foreseeable future.