w3 Flashcards
(14 cards)
Insider trading and why it is prohibited
The use of inside information (i.e., price-sensitive information that has not been disclosed to the public) relating to an issuer or its financial instruments, in order to make a profit or avoid a loss through trading activity.
- It undermines informational efficiency, which is fundamental for fair and effective financial markets.
Market primary function
The primary function of a financial market is to bring buyers and sellers together and establish prices, connecting the supply and the demand for financial instruments.
ECMH
Efficient Capital Market Hypothesis
Security prices at any time ‘fully reflect’ all available information
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Types of Information & Market Efficiency Forms
- Past prices → tested by Weak Form Efficiency (prices reflect all historical data; no use in technical analysis).
- Public/semi-public info → tested by Semi-Strong Form Efficiency (prices adjust instantly to news and reports).
- Private/insider info → tested by Strong Form Efficiency (prices reflect even insider knowledge—rare in practice).
What are the three mechanisms through which information becomes reflected in security prices?
- Universally Informed Trading – Info is instantly known by all → prices adjust immediately → fits weak-form efficiency (e.g., past price data).
- Professionally Informed Trading – Info is public/semi-public but mainly understood by professional traders → prices adjust as pros trade → supports semi-strong efficiency.
- Derivatively Informed Trading – Info is private, reaches market through insider activity or trade/price decoding → slower, fits strong-form efficiency assumptions, but real-world results are mixed.
Problems insider trading when used to inform the markert
- Slow and noisy price adjustment – Insider info enters the market gradually and is hard for outsiders to interpret.
- Unfair advantage that undermines trust
- Reduced investor participation – Fear of losses drives away retail investors, lowering market liquidity.
- Higher trading and capital costs – Market makers widen spreads, increasing costs for all and raising firms’ cost of capital.
Market egalitarianism for ECJ
Investors are placed on an equal footing and protected against the improper use of insider information
Market Abuse Regulation (MAR) scope
This Regulation applies to all transactions, orders, or behaviours related to financial instruments, regardless of whether they are traded on a regulated market or another trading venue, such as an MTF or an OTF.
-> created for uniform regulation in EU
Prohibition Mar
Article 14 MAR prohibits the following types of behaviour:
a)insider dealing or the attempt thereof
b)recommending to or inducing another person to engage in insider dealing
c)unlawfully disclosing inside information
Scope of application (specific)
Under Art 8(4) MAR, these prohibitions apply to any person who possesses inside information as a result of one of the following:
a)Membership in the issuer’s administrative
b)Holding a stake in the issuer’s capital
c)Access through employment, profession or duty
d)Involvement in criminal activities
What is inside information MAR
a) precise in nature (i.e., not vague and general
b) non-public (i.e., only known to insiders)
c) relating, directly or indirectly, to issuers or financial instruments
d) price sensitive, that is likely to have a significant effect on the prices of financial instruments if made public
Justified discolusre MAR
a)A close link between the disclosure and professional duties exists
b)The disclosure is ‘strictly necessary’ for the exercise of these duties
c)The disclosure is proportionate to the aims pursued.
Relationship ban and ad hoc discolusure
Ad-hoc disclosure primarily provides market updates on material changes in the issuer’s financial circumstances, like changes in structure, capital composition, or operations, as they happen. Ad-hoc disclosure complements the insider trading prohibition, enhancing informational efficiency by promptly informing investors about developments that may affect their trading decisions.
-> ASAP
Delaying disclosure
1)Immediate disclosure is likely to prejudice their legitimate interests
2)Delaying the disclosure is not likely to mislead the public
3)The issuer can ensure the confidentiality of the inside information
