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Brit Banking Regulator: Market ‘Cleaner,’ Insider Trading Down

Bruce Carton | July 3, 2015

In the Annual Report and Accounts 2014/15 for the Financial Conduct Authority, the UK's financial regulator stated that its most recent statistics for "market cleanliness" continue to show a "significant decline in the incidence of potential insider trading cases" since 2009. The FCA calculates market cleanliness by looking at

the proportion of potential insider trading cases, measured on the basis of abnormal price movements observed before takeover announcements of publicly traded companies, relative to the sum of all takeovers in a given period. 

As the chart below from the FCA's Annual Report shows, market cleanliness in the UK has improved dramatically since the 2006-2009 period, when 30% or more of takeover announcements were preceded by abnormal price movements that suggest insider trading:

MarketCleanliness 2014-15

The 2014 market cleanliness figure of 13.88% is the best since 2006.

The improvement in market cleanliness since 2009 coincides very closely with the UK's ramped up enforcement -- including the first-ever criminal prosecutions -- of insider trading. As the table below from a 2014 FCA report shows, convictions for insider trading in the UK were non-existent until 2009, when Hector Sants of the FSA (the FCA's predecessor) declared that the UK would begin taking a new, aggressive approach to enforcement. “There is a view that people are not frightened of the FSA,” Sants said in early 2009. “I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA.”

In 2009, the FSA obtained its first convictions for insider trading. It has succeeded in securing criminal convictions in every year since, including three more by the FCA in the most recent year ending March 31, 2015. 

UKEnforcement2014

In a July 2014 report, the FCA declined to claim that the apparent reduction in insider trading was the direct result of greater enforcement. The FCA stated that 

As mentioned, the fact that the market cleanliness statistic declined when high-profile prosecutions began does not prove causality. Whether increased enforcement activity leads to less insider trading and a lower market cleanliness statistic requires further research, data over a longer time horizon and a methodology that can establish the degree of the causal effect of enforcement action on insider trading. 
The FCA did observe at the time, however, that "the increase in the FSA’s enforcement activity and educational agenda and decrease in the market cleanliness statistic are roughly contemporaneous." One year later, the latest data from the FCA's 2014-15 Annual Report shows that this trend has continued.