As global bourse barriers come down, rules on abuse go up
As financial markets go global, so do people who manipulate them -- and so, now, do the regulators. In a step aimed at policing international stock and commodity trading, Britain and the United States this week began trading information aimed at detecting insider trading. A new Anglo-American agreement calls for exchange of market trading data and information on the operations and financial status of investment businesses.Skip to next paragraph
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``People with inside information are savvy enough to recognize that they can exploit it through another country's market,'' says Gary Lynch, director of enforcement at the US Securities and Exchange Commission. The new agreement is aimed at chasing them.
Parties to the agreement are Britain's Department of Trade and Industry and, in the US, the Securities and Exchange Commission and Commodity Futures Trading Commission (CFTC).
SEC chairman John Shad, who signed the memorandum, noted that ``this is an important step in US and U.K. joint efforts to protect investors against fraud in the international securities markets.''
CFTC head Susan Phillips cited the need for ``close cooperation between and among government regulators and self-regulatory organizations'' -- meaning stock exchanges and groups such as the National Association of Securities Dealers in the US and the International Securities Regulatory Organization in Britain.
Within a year, the US and Britain will begin negotiating a more wide-ranging treaty. Both nations, meanwhile, are seeking similar pacts from other major financial markets, especially Japan, Hong Kong, and members of the European Community.
The new US-British arrangement comes just four weeks before London's ``Big Bang'' of securities deregulation takes place, Oct. 27 -- an event analogous to ``May Day'' 1975 in the United States, when fixed commissions for brokers were abolished.
In Britain, the wall between ``brokers'' and ``jobbers'' will be eliminated and a series of other market liberalization measures will position the City, London's financial hub, as perhaps the most international financial capital of the day. American banks and brokerages have rushed to beef up their London staffs to take advantage of the ``Big Bang,'' and important Anglo-American financial ties have already been established.
The National Association of Securities Dealers and the London Stock Exchange have begun exchanging quotations for certain stocks traded in their markets. The London exchange has held talks with the New York Stock Exchange about a possible linkup.
But US regulators are concerned about the use of international channels to circumvent US regulations, especially those governing insider trading.
Rules on insider trading are less stringent in London and other markets than in the US. Thus an individual could fairly easily exploit non-public information for profit by doing so in a market like London's.
``Going abroad is the most effective way to do insider trading,'' says Ian H. Giddy, visiting associate professor of finance and international business at New York University. ``But it is not my impression that most countries [other than the US] are terribly concerned about it.''
He sees the US-British agreement as ``sending signals'' more than being aimed at specific problems.
Mr. Lynch of the SEC says the agreement is more ``preventive in nature.'' An example of how it would work: If the SEC suspects insider trading and wants to track specific transactions, it can ask brokerages in the US to open their records to SEC inspectors. Similarly, Lynch says, on a specific case the SEC can now ask British counterparts to supply similar information.
Dr. Giddy suspects that the impetus to exchange the insider-trading information is coming from the US. From the British point of view, he notes, the reason for agreeing with the US is probably just being prudent ``and not wanting the `Big Bang' to blow up in their faces.''
Information that is swapped under the new agreement is considered confidential and cannot be passed on to other government agencies.
The SEC already has similar agreements with Switzerland and Canada and is pursuing others with other nations. The CFTC currently has information-reporting arrangements with Singapore, Canada, and Australia.
But it should be noted that the steps being taken involve only financial reporting, not international enforcement. Because of issues that involve national sovereignty and competitiveness, it seems unlikely that much more than exchanges of information will take place. A Thursday column