The metamorphosis of insider trading in the face of regulatory enforcement

The purpose of this paper is to explore the prospects for and some foreseeable consequences of more intensive enforcement action against insider trading in the context of the UK, within the EU and international contexts.

The approach adopted is qualitative, based on the literature and policy papers, examining developments regarding enforcement against insider trading. Explores extent to which regulators are to some extent overcoming their previous ambivalence over enforcement action against insider trading. Examines the Spector judgement from the European Court of Justice. Looks at possible consequences of more robust enforcement on insider trading.

Three possible consequences are outlined. First, some persons contemplating insider trading may be deterred. Second, risk‐tolerant individuals and firms persist with insider trading, whilst taking some obvious precautions, thus shielding their activities against enforcement. Third, creativity and innovation within the largest, most sophisticated and reputationally cautious firms produce new patterns of trading that cannot legally be described as “insider trading”, for example by commissioning research services, as evidence from the USA suggests.

Information asymmetries within the market might not be reduced, rather they could just become less visible to the regulator. These would be mixed results; any regulator with an ambition to be more than reactive to events would already be thinking about the next move.

The financial market crisis and the regulatory deficiencies that it has exposed provoke greater pubic scrutiny, policy changes and critical research in relation to regulation and enforcement. This paper examines aspects of this ongoing process and contributes to it.