Insider dealing is bad – but not as bad as it looks
Insider trading preceded 31 per cent of takeovers, screamed the headlines: London is more corrupt that any other financial centre. Well dig deeper into the data and the City is not quite as guilty as charged.
The Financial Services Authority’s report does not mention “suspicious trading” but refers to “abnormal pre-announcement price movements” or APPMs. But yes, they did accompany 30.6 per cent of bids in 2009, says the watchdog - though that figure has not changed significantly in recent years.
However, the FSA admits it would expect 10 per cent of abnormal movements even in a normal market – and with a 5 per cent margin of error either way. So that explains half the annual figure. Further, it admits: “An abnormal price movement could be an indicator of insider dealing. However it can be easy to misinterpret what the market cleanliness statistics show, especially with regard to share price movements ahead of takeover announcements.”
There are many reasons why a share price can move against the market ahead of a bid other than one of the parties dealing in a private capacity. The FSA looks only at the two days before an official bid announcement but it is common now for intentions to be flagged ahead of the start of the bid timetable – sometimes by several weeks. It is not unknown for analysts to speculate on bid intentions too – and for the press to report the analysts’ speculations. Sometimes the possibility of a bid is even leaked to test the market reaction. And bid timing can be determined by the results or trading announcements of either bidder or target - events that also trigger buying or selling.
But what the FSA does not consider is that it may not be unusual trading that precedes a bid, but a bid that follows unusual trading. A company mulling making a takeover in coming months can be bounced into an early announcement if it sees shares in its target suddenly changing hands or the price moving upward. The bidder needs to bring forward its timetable to stop shares hedge-funds or other speculators accumulating positions and to ensure that the offer price still represents a good premium to the pre-bid level.
The level of abnormal price movements ahead of other announcements such as results is only 4 per cent – against the FSA’s expected normal level of 3 per cent with a 5 per cent error margin – and that is well down on the 20 per cent measured in the late 1990s. As the dates of results and trading announcements are well known in advance, it is not surprising if some investors deal ahead of their expectations of these statements. And the steep fall in the figure may reflect companies increasingly guiding analysts’ expectations – something regarded as good practice rather than inside information.
And if the UK has the worst level off abnormal price changes it may be because Britain is the only country where they are regularly monitored by its regulator.
Take out the legitimate abnormal price movements and the level of possible insider dealing is smaller – but just as unacceptable. It is this true core on which the FSA should concentrate and its recent record has produced results. Last year it levied 46 fines totalling £34m; in the first few months of 2010 there have been 26 fines raising £49m. If successful prosecutions deter insider dealing – whether in the print room or the boardroom – the City will be a better place.
But the statistic the FSA does not publish is how many abnormal price movements were not followed by bids. The City bets on lots of possibilies, many of which do not occur. Even if speculators correctly anticipate 30 per cent of takeovers, on how many more occasions do they take a position on an outcome that never happens?
