Black Sheep of the industry

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The New York Stock Exchange is the largest exchange in terms of capitalized trading volume and is five times the size of NASDAQ in capitalization, although the exchange is the fourth largest in listings behind the Bombay, London and NASDAQ exchanges. Photo: loudguitars

There is a reason why the investors of the world cringe at the sight of the word insider trading. It is like the investors and participants involved in the capital markets are agreeing to the fact that they are involved in the heinous manipulation of the market for their own gains. The disgust is raised due to the fact that even though the community only has a few black sheep, the revelation of any such scandals proves the observers correct by exaggerating the reality and making the whole industry look bad.

Another insider trading scandal has been brought to the fore front now which is a blow to the already beaten down confidence and investor trust in the market. The Manhattan US attorney’s office has launched an investigation in an article by the Wall Street Journal showing that company executives trade in the shares of their own company before the release of essential material data. This data then leads to significant s price shift in the stock leading to returns for the executive themselves.

The scope of the companies involved is from every industry of the market and so there are no proper checks and balances or narrowing of the convicted parties in this regard. This effort is the culmination of three years of efforts by the SEC to curb the practise of insider trading and to punish it properly in the future. It seems like the practice has come a full circle by now. This was done by the  executives and managers in the market , in the past and so early action and compliance procedures ended insider trading during the time.

People started getting around the red tape by sharing the information with outside parties where they would indirectly benefit and would use the loophole in the system. Now it seems that executives are again taking advantage of the lack of oversight. The investigation started after WSJ reported that executives had taken advantage of the share price before release of bad news netting them a gain. The party identified till now is Big Lots Inc. CEO Steven Fishman whose trade history shows that he carried out this practise.

Mr. Fishman defends that this was not the case as he followed a 10b5-1 plan which allows them to place the trade before a specified time. It seems that there is a discrepancy of technicalities which has to be ruled on. The plan allows the executive to choose certain arbitrary limits and data points which still leaves this open to manipulation. Other trades that have been flagged include Body Central, Cardtronics, Micrel Inc, Mohawk Industries Inc. and Cobalt Industries.

At this point the investigation is in its infancy and more names are expected to be thrown up as time goes on. The trades are also expected to be disclosed which can show the gaming of the market and efforts can be done in order to stop it in the future. It seems again that the system will be abused and regulators are always a step behind. In this case, the matter never came to hand until the WSJ investigated the matter. This shows that there should be a better whistle-blowing system put in place so that the gap that cannot be filled by the regulators can be taken over by active market participants. This does not use the resources of the agencies while providing a better oversight mechanism to be put in place.

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