Table of the day: the FSA’s success to date in stemming takeover leaks.
*IPM – “informed price movement” (stupid)
To be fair to the FSA, it adds the following rider:
It can be easy to misinterpret what the market cleanliness statistics show, particularly with regard to takeover announcements. In particular, the statistics have often been reported as suggesting the level of IPMs is a direct match for the level of insider dealing — for example an IPM of 25% in a year equates to insider dealing ahead of 25% of all announcements in that year. This is an inaccurate interpretation. So we thought it would be helpful to set out the following short commentary on what an IPM may, and may not, indicate.
In particular, it is important that the statistics are not viewed in isolation.
1. Some of the IPMs we observe may be the direct result of trades by insiders.
2. Some IPMs will indirectly result from trades by ‘informed’ traders who picked up on and derive information from insiders’ trades.
3. Our measure will also include instances of abnormal trading ahead of announcements which were not due to trading by insiders but due to other circumstances. For example:
a) IPMs triggered by legitimate (non abusive) trading due to:
• financial analysts or the media doing a good job at assessing which companies are likely takeover targets., or investors betting on a likely outcome.. Since the measure captures legitimate speculation about likely future transactions, there may be significant price movements in the named stock or sector. The level of non-abusive informed trading is unlikely to remain constant over time.
• non abusive trades, for which there is a perfectly rational explanation, that just happen to fall before an announcement.
b) IPMs triggered by a deliberate ‘strategic’ leak of information by a company or its advisers to help position an important deal in the marketplace. Leaking this information is clearly improper, but it may not actually give rise to any opportunity for insider dealing because the information is typically passed directly to the media (rather than traders) who publish the story. Market traders then react to the story by buying stock speculatively in case the story is true — causing an IPM.
4. Due to the statistical thresholds we use when computing IPMs, even if there is no insider or other (legitimate) abnormal trading, we would not expect the results to be zero but on average, 3% for the FTSE 350 data set and 10% for takeovers. Thus, taking the 2007 takeover figure as an example, of the 28.7%, we estimate that 18.7% of announcements are preceded by some form of abnormal price movement. These may represent either insider dealing or legitimate informed trading, the split of which is difficult to determine. It is also important to note that, for takeover announcements, for reasons of statistical significance a movement of 5% in either direction is needed before it is safe to conclude that the level of informed trading has changed at all. For these reasons, whilst we believe that we do need to reduce the level of IPMs for takeovers, we do not believe specific targets would be meaningful.
It is also worth noting there could be insider dealing before announcements that does not result in an IPM if trades by insiders do not have a high enough impact on prices.
But come on, 24 to 28.7 per cent in seven glorious, rule-filled, paranoid years does not offer much evidence that the costly market abuse regime actually works.
What we want to know is – who was a leak duty in 2003?