The level of suspicious trading ahead of UK mergers and acquisitions fell sharply last year to 21 percent, the lowest level since 2003, as regulators around the world intensified efforts to combat insider trading.
Sharon Lorimer
Last year, timely trades – defined as abnormally large share price movements in a company in the two days before a regulatory announcement – preceded 25 of 118 UK-announced deals.
That was down almost one-third from the past four years, when the level hovered around 30 percent The drop comes as the Financial Services Authority – the only major regulator to report publicly on the cleanliness of its markets – has strengthened its detection efforts, prosecuted more people and in effect tripled fines in most civil cases.
US authorities have also launched a high-profile crackdown against insider dealing, using wiretaps and other tactics previously reserved for terrorism and organised crime.
The FBI has raided several hedge funds in a wider probe of “expert networks” that link corporate insiders with traders, and 53 people have been convicted or pleaded guilty since the 2009 arrest of Galleon hedge fund founder Raj Rajaratnam.
Traders on both sides of the Atlantic agreed the cases have sent a shock through the markets. Some hedge funds may be steering away from questionable practices, and others are investing more heavily in compliance.
Zvi Goffer, a former Galleon trader nicknamed “Octopussy”, on Monday became the latest person to be convicted in the nationwide crackdown.
Mr Rajaratnam was convicted last month for running the largest insider trading schemes in a generation.
He is scheduled to be sentenced next month. The FSA said it was not sure what was behind the decrease in suspicious activity. Last year was a relatively slow year for M&A.
Some abnormal trading patterns also reflect media speculation and the FSA has cautioned companies against deliberately planted rumours. The FSA has also intensified its enforcement.
Five people have recently been convicted, including the first-ever prosecution of an active banker.
“The FSA has had some successful prosecutions and they are hitting relevant City targets. It is having a deterrent effect,” said Ian Mason, UK partner at Baker & McKenzie.
“The Galleon case has also helped the FSA cause because they can say we would like those powers too.”
Tracey McDermott, acting FSA enforcement head, said: “We welcome this drop and note it with interest but we want to see a continuing trend before we draw any conclusions."