Blending fairness and efficiency. An analysis of its desirability in the context of insider trading laws in Australia

Date03 May 2013
Published date03 May 2013
AuthorAfroza Begum
Subject MatterAccounting & finance
Blending fairness and efficiency
An analysis of its desirability in the context
of insider trading laws in Australia
Afroza Begum
Department of Law, University of Wollongong, Wollongong, Australia
Purpose – The regulatory approach to insider trading (IT) in Australia is premised on a “blend” of
fairness and efficiency which has generated an important controversy. The study aims to investigate
this controversy by critically analysing the way the policy maker and judiciary have been striving to
accomplish the regulatory goals based on this blend.
Design/methodology/approach – This research is based on existing primary and secondary legal
Findings Regulation of insidertrading (IT) with an appropriate enforcement mechanism has become
an important issue in Australia. As part of this, a range of legal studies have unveiled significant
difficulties in successfullyprosecuting insiders which largely reflect a serious disappointmentwith the
operation of the IT law. Whilst the output of this research motivates and enhances a broad scholarly
debate on the credibility of the current regime in combating IT and in generating a strong form of
deterrent against prospectiveinsiders, there has been a dearth of intellectual inquiries (to the best of the
author’sknowledge) backed up by a reliable assessment about the merits of the law, and especially about
the issue of how the courts are applying a “blend” of the two policy rationales: market fairness and
market efficiency in resolving particular circumstances. It is submittedthat this paper will contribute
to filling this gap in the legal literature and the wider academic deliberation on the quality and
effectiveness of the IT regime.
Originality/value – This paper is the original work of the author and has not been submitted
elsewhere for publication.
Keywords Insider trading,Australia, Law, Market fairness,Market efficiency
Paper type Research paper
1. Introduction
Market fairness and market efficiency are primary policy rationales that fuelled the
regulatory reforms in Australia to redress a number of fundamental flaws in the earlier
provisions dealing with insider trading (IT) (Lyon and du Plessis, 2005, pp. 8-10).
The fairness approach (grounded on the equal access theory) advocates that IT
provides an unfair advantage for the holder of information who can exploit its benefits,
and correspondingly disadvantages/incapacitates the remaining market participants
to obtain the same information by competitive means, which are morally and legally
unacceptable (Carlton and Fischel, 1983, p. 858; Carney, 1987, pp. 868-876)[1].
In contrast, efficiency’s traditional enquiry focus highlights IT’s beneficial effects,
suggesting that it encourages more effective, accurate and particularly timely price
signalling for securities to the market. It has also been suggested that IT represent s a
legitimate reward for enterprise and as a form of “compensation” for those decision
takers in companies (Anabtawi, 1989, pp. 385-399)[2]. Arguably, the merger of these two
rationales is very unlikely to produce the desired outcome of IT regulation, especia lly
when they are conceptually designed and committed to pursue distinctive goals
The current issue and full text archive of this journal is available at
Journal of Financial Crime
Vol. 20 No. 2, 2013
pp. 203-221
qEmerald Group Publishing Limited
DOI 10.1108/13590791311322373
fairness and
(Rv. Firn, 2001, NSWCCA 191; Mannolini, 1996, p. 151). Yet, empirical eviden ce is
unavailable to suggest that endorsing either one or the other will advance the regulatory
goal. Instead, academic research confidently demonstrate that efficiency cannot be
generated in and of itself but rather is best achieved through the promotion of a
transparent securities market that stimulates and sustains some core notions of fairness,
such as the equality of access to information, the creation and maintenance of an
informed market, and improved investor confidence (North, 2009, pp. 249-253).
By adhering to the perceived spirit of the merged concepts as entrenched in the
regulatory reforms in Australia, this paper argues that an appropriate interaction
between “fairness” and “efficiency” is not only desirable but also inevitable to facilitate
the goal of IT legislation, and that the regulatory objectives can be best ensured in an
increasingly technologically advanced securities market through the combination of the
core values of the two instead of trying to separate one from the other. In an attempt to
substantiate this argument, the study develops a hypothetical scenario (where each –
“fairness” then “efficiency” – is held up as a separate approach) based on available
primary and secondary sources. It critically examines the appropriateness and
effectiveness of the blend by placing a special focus on the way policy makers and the
judiciary have striven to accomplish the two fundamental objectives – market fairness
and market efficiency – in terms of both their extent and degree of sophistication,
despite the absence of a convincing past record of successful IT law enforcement in
Australia (at least until very recently)[3].
Drawing upon the findings from an application of the above hypothesis, the paper
concludes that fairness and efficiency are complementary in the Australian context
where the blend has been endorsed on the basis of the need to promote investor
confidence in the fairness and integrity of the market, rather than to espouse either of
the two contrasting goals separately.
The following section begins with a brief exploration of the “fairness” and
“efficiency” rationales in dealing with IT and highlights only a few contrasting aspects
of these two approaches relevant to the main argument of the paper. Section 3
examines the background of IT regulation in Australia with special reference to the
fundamental policy justifications that have been drawn from a merger of the two
rationales. Section 4 analyses how the policy maker and courts have endeavoured to
achieve the regulatory goals by striking a balance between the two rationales . Section 5
provides a conclusion.
2. Fairness and efficiency as competing approaches
The long standing legal controversy over the feasibility and desirability of regulating
IT remains unresolved in many jurisdictions, including the USA (Beny, 2007, p. 238).
The “fairness approach” – supporting the need for regulation – claims that IT generates
an unethical corporate culture by resisting a transparent and informed market, noting
that such a corporate culture inevitably promotes unfair disadvantages of the ignorant
market participants to evaluate all relevant information for investment de cision-making
(Carlton and Fischel, 1983, p. 873)[4]. This ultimately leads to illiquidity, disinvestment,
and an erosion of investor confidence in the securities market. This fairness rationale
aims to ensure that the market operates freely and fairly with all participants having
equal access and opportunity to relevant information (Griffith Report, 1989, 3.3.6;
Rubenstein, 2002, p. 93).

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