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UK markets are now cleaner, says watchdog

London's financial district, known as the Square Mile.
Getty Images
London's financial district, known as the Square Mile.

The practice of insider trading has fallen significantly in the U.K. in the years following the global financial crash, according to a new research paper by the City watchdog.

Illegal in the country, insider trading is the trading of a security by an individual who has access to non-public information. Regulatory authority the Financial Conduct Authority says that its "market cleanliness statistic" remained close to 30 percent between 2007 and 2009, but has since dipped from 2010 onwards to a level of about 15 percent last year.

To calculate it, the market regulator analyzes the scale of share price movements in the two days prior to takeover announcements to identify abnormal movements in share prices. It added that the increase in its own enforcement activity and educational agenda has coincided with this dip in insider trading but held short of saying this was as a direct consequence.

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"It is possible that those trading on insider information may have better masked their activity," it conceded, meaning that traders might have dealt in volumes that would not cause significant price spikes or traded in such a way they've have had less impact on stock prices. It also said that theoretically, the fall could be caused by any of a number of relevant factors that might have changed, with a significantly large drop seen in 2009.

However, if indeed its research is deemed to be accurate, then the FCA believes that three factors may be responsible:

  • opportunities for insider trading may have decreased
  • the risk aversion of insider traders has increased
  • the chance of getting caught has increased.

"Market activity has obviously changed markedly since the financial crisis and there could be a change in traders' risk aversion. This could be because previous insider traders are now less willing to take risks, perhaps driven by the difficult job climate in the financial industry," the FCA said.

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"Or it could be that career insider traders may have left the financial industry: insider trading only became illegal in 1985 and perhaps traders who began their careers before this time are more likely to insider trade and began to exit the industry following the crisis."

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