Documente Academic
Documente Profesional
Documente Cultură
Mouen, Christine J.
April 14th 2016
Table of Contents
Introduction................................................................................................................ 2
Background and Thesis........................................................................................... 3
Literature Review.................................................................................................... 4
Scope of Study........................................................................................................ 5
Methodology............................................................................................................... 5
The Securities and Exchange Board of India (SEBI).................................................6
Some prominent insider trading cases In the India Market.....................................8
Hindustan Lever Limiteds purchase of 8 lakh shares of Brooke Bond Lipton India
Limited................................................................................................................. 8
Palred Technologies Limited...............................................................................10
Conclusion................................................................................................................ 12
Limitations and further research.............................................................................. 13
References................................................................................................................ 13
Introduction
To understand the effect of insider trading on the stock market, we need to first
understand who is an insider, what is stock market volatility and what is insider
trading? Insiders are corporate officers, directors, shareholders owning more than
ten percent and any person having access to or receiving information of a nonpublic
nature on which trading is based for a public company. The United States
government helps facilitate fair-trading through the regulations of the Security
Exchange Commission (SEC), and the implementation of the Securities and
Exchange Acts of 1933 and 1934. The SEC requires every person to file a form
(Form 3) when the individual becomes an insider. Form 3 is the initial statement of
ownership showing all holdings and must be filed immediately upon having insider
status, even if no shares are owned initially. This form verifies the person has
become an insider. Once a person has become an insider, each change of share
ownership must be filed using the SEC Form 4. Form 4 indicates when an insider
has bought or sold shares of their companys stock. Insiders must file electronically
via EDGAR (an electronic filing system used by the SEC at the SEC website) within
two business days of each transaction. Although there is a lag time of two days, this
lag time is more efficient than the old rule stating insiders had until the tenth day of
the following month to file. Information on who is considered an insider is public
information and is available on the SEC website. Insiders are barred from buying
then selling, or vice versa, their stock within a six month period. This rule helps
prevent illegal insider trading from occurring.
Simply put, stock market volatility is when the stock market goes up one day, and
then goes down the next three, then up again, and then down again. A great
example is when car insurance premiums go up along with the likelihood of risky
situations, like a poor driving record. Stock market volatility is a polite way of
referring to investors nervousness who may think volatility indicates a problem, but
to many analysts increased volatility can indicate a rebound. Lee, Jiang, and Indro
(2002) test the impact of noise trader risk on stock market volatility and excess
returns. Using the Investors Intelligence sentiment index, they find that volatility
Jennifer Moores article (1990) defines insider trading as the buying or selling of
securities on the basis of material, non-public information and it is popularly
believed to be unethical and illegal. Essentially, insider trading involves the
deliberate exploitation of unpublished piece of sensitive information obtained
through or from a privileged relationship to make profit or avoid loss by dealing in
securities of a company when the prices of securities would be materially altered if
the information were disclosed. To most people, it seems rather unfair that some
speculators are able to make profits at the expense of others who just happen to
know less about any assets in question. A situation quite similar to the attitude
towards insider trading is that of a car dealership selling used cars without
disclosing the past recalls or accidents of their used cars to its buyers. Although,
there are significant economic differences between the used car market and the
financial market, the idea of fairness and unethical is the same. Apart from the
fairness principle, insider trading is assumed to be acceptable as long as the
information obtained is opened to everyone and only if there is a no breach of
fiduciary duty or a breach of trust and confidence (Dennert, 1991).
Literature Review
Petri Kyrlinen (2008) research focuses particularly on the relation between day
trading and stock price volatility from the point of view of individual investors. He
attempt to achieve a more complete picture of the relation between day trading and
volatility, analyzing the trading records of the most important institutional Finnish
investors from both financial and non-financial firms. Kyrlinen also spends time
attempting to answer the question if high share of individual investors day trade
volume are good candidates for high noise-trading stocks and are they a probable
cause for market volatility over information flow? After using a few variables, his
results are conclusive supporting his theory and other previously conducted similar
studies that day training impacts market volatility and noise trading has an effect
on market volatility over informative institutional trades.
In another research examining other factors impacting market volatility, Hasslers
examines the correlation between foreign influence and stock market volatility using
Scope of Study
It has also been argued that allowing insider trading would help mitigate the agency
problem between the management and the shareholders of a company (Padilla,
2002). Agency problem arises when the interests of managers and shareholders are
widely different and managers are driven to act by their own self-interest instead of
the best interests of the shareholders. Shareholders can practice insider trading and
benefit from the same, thereby mitigating agency problems, and increasing the
value of the firm. Also, insider trading is argued to improve informational efficiency
of markets by contributing to the existing information set held by investors (Clacher,
Iain et al., 2009). In this view, insider trading helps in reducing market volatility by
signaling the market to confirm or contradict the information available to the public.
Also, it can be argued that though insider trading may temporarily increase market
volatility in order to correct the price in the market, in the long run it does reduce
the market volatility. The positive effects of insider trading have not been proven so
Methodology
Several studies have had different conclusion about insider trading. Though a
majority of these studies concluded that insider trading does indeed result from
insiders and those who have access to inside information benefiting by abnormally
high returns, some recent studies have contradicted that the same is not possible.
Hence, the debate is still on, on this controversial topic. So far, most of the research
on insider trading has been done in developed markets, especially United States of
America, United Kingdom and parts of Europe. Since a detailed analysis of insider
trading has not yet been performed in most under developed markets, such as,
India. This report shall cover insider trading and its effects on Indian market and the
current regulations in place by the regulatory authority, Securities and Exchange
Board of India (SEBI)
There are certain mandatory disclosures to be done as per the Act. SEBI has
formulated a code of internal procedures and conduct to prevent insider trading.
Any person who holds more than five percent shares or voting rights in any listed
company, the number of shares or voting rights will be held by that person, within
two working days of becoming the holder. There are many other disclosure clauses
that follow the above clause including that of disclosure to the stock exchanges, in
which the company is listed. Since Stock Exchange is where majority of trading is
done on a daily basis, and the network of the Stock Exchanges is usually the largest,
this serves the purpose well. These amendments do bring more transparency and
convenience to all investors including that of insiders. Disclosure of information may
be done through various media, so as to achieve maximum reach and quick
dissemination. Company websites may provide a means of giving investors direct
access to analyst briefing material, significant background information, and
questions and answers. Amendments to the act have been made with regards to
disclosure to facilitate faster flow of price sensitive information to the public
whenever necessary, in order to reduce the time gap between the same being
known only to the insiders and being known to the general public. These disclosures
would indeed ensure better market response and hence would reduce the chances
One more important policy that SEBI has formulated is the Chinese Wall policy.
This policy has been incorporated in order to prevent the misuse of confidential
information. As per the act, all companies have to follow this policy. The policy
separates those areas of the organization which routinely have access to
confidential information, considered inside areas from those areas which deal with
sales/marketing/investment advice or other departments providing support
services, considered public areas. According to this policy, the insiders shall not
communicate any price sensitive information to anyone in the public area on the
other side except under specific circumstances when absolutely necessary under
intimation to the compliance officer. A more noteworthy point is that all rules are
being adhered to by the companies and individual insiders. A proof to this is that
companies had approached SEBI with various doubts regarding subsequent
In this case, the trading pattern facilitate the investigative case of SEBI, making it
easy for them to pinpoint insider trading, and the fact that multiple family members
were used in this situation made the case obvious. Seen from the figure above, their
trading pattern did have an effect on market volatility and had they had somewhat
of a random trading pattern, the accused parties could have gotten away with the
crime. This case also helps support Cheng and Lo (2006) study that corporate
insiders will have the ability to gain from insider trading which may in turn induce
them to either manipulate or delay value-relevant information to maintain their
informational advantage over outside investors and profit from that information.
Conclusion
Based on previous research conducted in the United State of America, United
Kingdom, and other parts in Europe, it is clear that the United States of America law
or other developed countries are indeed stringent and efficient in bringing the guilty
to justice. Under the presence of such a strong system, investors would definitely
References
Attaulla, Ali, Marc Goergen and Hang Le. "Insider Trading and Financing
Constraints." The Financial Review (2014): 685-712. Document.
Bessembinder, Hendrik and Paul Seguin. "Futures-Trading Activity and Stock Price
Volatility." The Journal of Finance (1992): 2015-2035. Document.
Cheng, Qiang and Ki Lo. "Insider Trading and Voluntary Disclosures." The Journal of
Accounting Research (2006): 815-848. Document.
Degryse, Hans, De Jong Frank and Jrmie Lefebvre. "Legal Insider Trading and
Stock Market Liquidity." Netherlands Economic Review (2016): 83-104.
Document.
Dennert, Jrgen. "Insider Trading." Kyklos International Review of Social Science
(1991): 181-202. Document.
Du, Julan and Shang-Jin Wei. "Does Insider Trading Raise Market Volatility." The
Economic Journal (2004): 916-946. Docment.
Frino, Alex, Stephen Satchell and Brad Wong. "How much does Illegal Insider Trade?"
International Review of Finance (2013): 241-263. Document.
Gerlack, Jeffrey. "Imperfect Information and Stock Market Volatility." The Financial
Review (2005): 173-194. Document.
Hassler, John. "Does Increased International Influence Cause Higher Stock Market
Volatility." Scandinavian Journal of Economics (1999): 1-9. Document.