Insider trading – unsolved issues

Publication Date02 Jul 2019
AuthorFabian Maximilian Johannes Teichmann
SubjectFinancial risk/company failure,Financial crime
Insider trading unsolved issues
Fabian Maximilian Johannes Teichmann
Teichmann International AG, St. Gallen, Switzerland
Purpose This paper aims to show that, despite the development of prevention mechanisms for banks,
undetected insidertrading remains highly feasible. It, thereby, highlights that the current anti-insider-trading
mechanisms,on which previous literature has extensively focused,can be easily circumvented.
Design/methodology/approach A two-step research process was employed. First, informal
interviews were conducted with illegal nancialservices providers. Second, 50 compliance experts and law
enforcement ofcers were formallyinterviewed. Responses from both sets of intervieweeswere subjected to
quantitativecontent analysis to yield empirical ndings.
Findings Concrete and specicmethods of insider trading and limiting the risks of being prosecuted were
reported by interviewees. They suggested that the use of strawmen and offshore banks greatly facilitate
insider trading.
Research limitations/implications The perspectives of the 100 interviewees have not been
Practical implications Suggestionson how to more effectively combat insider trading are providedfor
nancialinstitutions and compliance ofcers.
Originality/value Although the empirical ndings are based on conditionsin Europe, the results have
potentialglobal application.
Keywords Compliance, Financial crime, Insider trading
Paper type Research paper
Financial services providers are subject to extraordinarily strict anti-insider-trading
obligations. This has necessitated the hiring of multitudinous compliance professionals by
the nance industry to full those legal requirements. However, whether current
mechanisms to prevent insider trading are effective in practice has yet to be thoroughly
investigated. Financial institutions need to understand whether their compliance
mechanisms are simply an expensive alibi. Therefore, this study aims toassess the ease of
circumventing current anti-insider-trading mechanisms and consider how they should be
adjusted to increase robustness. Based on its empirical ndings, the paper concludes by
outlining suggestionsfor nancial regulators, nancial institutionsand compliance ofcers.
Literature review
The negative consequences of insider trading have been extensively documented (Givoly
and Palmon, 1985, p. 69; Meulbroek, 1992,p. 1661; Keown and Pinkerton, 1981, p. 855; Jarrell
and Poulsen, 1989,p.225;Cornell and Sirri, 1992, p. 1031; Carltonand Fischel, 1983, p. 857).
In this context, insidersgenerally refers to corporate ofcers, directors and large
stockholders: they have access to information that is not publicly available (Jaffe, 1974,
p. 410). Exploiting this private information can benet a few while harming other market
participants. Most countries have, therefore, prohibited insider trading. The corporate
policies aimed at restricting insider trading have also been extensively investigated (Bettis
et al., 2000, p. 193). However, whether insider trading laws are effective in practice remains
Journalof Financial Crime
Vol.26 No. 3, 2019
pp. 786-792
© Emerald Publishing Limited
DOI 10.1108/JFC-08-2018-0079
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