Stock market is considered as the secondary platform for trading shares, stocks and debentures of listed companies. Technically, stock market allows existing investors to liquidate their holdings and at the same time facilitates investments by new investors for the company's ownership. Hence, continuous trading of shares and debentures is one of the main features of stock market. In the developed world, the stock market is termed the economic barometer as its performance reflects a country's economic growth. The economy is considered to be growing when the stock exchange index rises; similarly, plunge in stock market index indicates economic downturn.
However, this special economic feature of stock market has not yet reached a mature level in our country. Consequently, correlation between the country's economic state and the movement of stock market index is hardly observed. We have previously seen on many occasions that the country's economy has grown despite persistent fall in stock market index. Since stock market is the secondary investment platform, gains in share prices on top of dividend earnings are the investors' main attractions. To speak the truth, dividend earning from investment in a company's share is a regular income stream, while share price gain is considered a bonus earning.
However, our stock market has already deviated from that theoretical grounding. The focus has now shifted from dividend earning to share price gain. As such, this stock market has now turned into a speculative place for investment. People these days prefer speculative gain to regular dividend earning. Even the institutional and non-institutional investors both emphasise on speculative gain rather than on dividend earning. Investors devise many strategies and undertake various measures in order to maximise speculative gain. Although these strategies and measures are always in compliance with rules and regulations, yet many deviations and abuses thereof are observed in stock market manipulations.
STOCK MARKET IS A SENSITIVE INVESTMENT HUB: Because of its special characteristics, stock market is deemed to be a supersensitive investment hub, which is usually responsive to any economic or non-economic developments. Samsung cell-phone's expansion in India had more impact on the share price of Samsung than its financial results. Similarly, news of the Summit between US President and North Korean President positively contributes to increasing the share price, while uncertainty about the summit causes negative impact on share prices, though there is no direct link between the two. Because of this sensitivity, stock experts, financial analysts and investment advisors closely monitor almost all events across the globe, and they update their investment recommendations accordingly.
Since the stock market is responsive to any national or international event, opportunists are always present there. Rumours, propaganda, fake news, information leak etc. routinely pass through the stock market. Price sensitive information (PSI) is one of such element that influences the stock market. PSI is a very important aspect of any stock market, as allegations of insider trading are directly related to it. Information having positive or negative impact on price movement of a company's share is categorically known as PSI. There remains a possibility that persons having privileged access to a company's PSI may take advantage by trading his/her stake in the company's shareholding prior to the impact caused in the market due to dissemination of that information.
Trading based on confidential but privileged information is termed insider trading. PSI has been commonly used as a manipulative tool in the stock market, and general investors have often been its victims. This malpractice has been happening in the stock market either overtly or covertly for a long time. Stringent rules have been enacted, but insider trading based on PSI could not be prevented. Instead, insider trading either in violation of law or in the guise of law has been taking place in almost all stock exchanges across the world.
INSIDER TRADING IS A GLOBAL PROBLEM: Insider trading is a common problem in both the developed and developing countries. The general investors have been suffering immensely from this malpractice. The USA has been facing tremendous difficulty in dealing with the curse of insider trading, although there is strong regulatory presence and highly stringent law against insider trading. The regulators and the market players in the USA compete against each other over the issue of insider trading. If the regulators frame a law, the market players counter it by devising new strategy for manipulating the market.
The latest addition has been the hedge fund. It is now being abused by the major market players. They tactfully use PSI in reaping manipulative gain from the stock market in the name of managing hedge fund. After the USA, Europe is the place where regulator's role is very strong and visible. Yet their bourses are not free from this malpractice, as reports of insider trading routinely emerge. The regulatory bodies remain busy in framing one law after another to eradicate the malaise. Their new contribution has been the enactment of Market Abuse Regulation that came into force in July 2016. This new law is expected to strengthen the regulators' hand in curbing insider trading.
In Argentina, insider trading was so rampant that the general investors had been the worst victims of this malady. In spite of strong will, the Argentine government could not protect general investors from the curse of such trading. Having failed to protect investors from insider trading, the Argentine President termed insider traders as "vulture investors" who made profit out of the misery of the poor. In Mexico, law against insider trading is not very strong; yet 28 people have been punished for involvement in insider trading during the last 10 years. Penalty up to a maximum $58,000 is randomly imposed on any person found engaged in insider trading.
In Brazil, there is a law for sending people to jail for violating insider trading prevention law; yet, this corrupt practice is rampant in the stock market of that country. In Chile, there is huge penalty against insider trading; yet this malpractice is common there. In Singapore and Hong Kong, law against insider trading is very stringent, and watchdog bodies are active in those countries. Yet insider trading could not be stopped. Reports of insider trading regularly get published in the local media triggering investigations. Even in India, there are allegations of widespread insider trading and the general investors are always affected there.
Bangladesh is not an exception to this global malpractice, as the allegation of insider trading is quite common in our stock market. This trend has worsened to some extent nowadays mainly due to lack of exemplary punishment. Besides, it is very difficult and in many cases almost impossible to prove the allegations of insider-trading with proper proofs and documents. The present writer had an opportunity to work in the surveillance department of the country's capital market watchdog, and had to encounter many situations with regard to insider trading. Investigations were conducted based on specific allegations, but those could hardly be established through proper documents and papers.
Nironjan Roy is a banker
based in Toronto, Canada.
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