Diapositiva 1 - Instituto Iberoamericano de Mercados de Valores

Enforcement of insider trading:
empirical results and one practical case
Guillermo Larrain
Superintendente
Superintendencia de Valores y Seguros, Chile
Presidente, Comité de Mercados Emergentes, IOSCO
Conferencia “Foro sobre Modelos de Supervisión”
Organizada por la CNMV y el IIMV
Madrid, September, 2008
Insider trading : old phenomena,
adult regulation, young enforcement
Figure 1. Insider Trading Regulations in the Twentieth Century
200
Countries in
the world
180
160
140
120
100
Countries with
Stock Markets
80
60
40
20
0
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
Source: Utpal Bhattacharya (2008): “When No Law is Better than a Good Law”
Insider trading : old phenomena,
adult regulation, young enforcement
Figure 1. Insider Trading Regulations in the Twentieth Century
200
Countries in the
world
180
160
140
120
Countries with
Stock Markets
100
80
… with Insider
Trading regulation
60
40
… which enforce
IT regulations
20
0
1900
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
• Increasingly countries consider IT a bad practice, but few of them do something about it.
• As no law could be preferable to a law not enforced regulators must take actions
How much IT takes place?
From the perspective of the
announcement date, there is
clearly an anomaly.
Pricet
Anomalies can be or cannot be
due to insider trading activities.
Alternative explanations include
• issuers keep a good flow of
information to markets so
market participants can foresee
price movements,
• research by brokers is good
enough so as to anticipate
official announcement effects
Announcement
Time
How much IT takes place?
Juan J. Cruces: “Anticipation and Impact of Corporate Announcements in
the Americas”, SVS Research report
How much IT takes place?
Results from the
Abnormal returns model
Results from the
Abnormal volatility model
Results from the
Total returns model
Conclusion: IT exists, it is significant and we are far
away from tackling it properly
• Enforcement of IT is still a process in the making:
– Locally, regulators must learn how to face it and
market participants must realize the damage they
cause on markets
– Internationally, regulators must improve their
coordination and cooperation
• LA countries, Chile among them, do not appear
particularly bad, but
– poor previous enforcement compared with the US,
– better information from issuers available in the US
– better research available in the US
suggest that anomalies in prices in LA and Chile are
more probably linked to IT activities
The approach taken by the SVS to enforce insider
trading regulation
• Regulation concerning IT dates back to 1981
• First case enforced in 1988. Since then, until 2006, there
were 19 cases.
• Enforcement division created in 2001
– From 2 to 12
– Material improvement: software, databases, knowledge [critical
exchange of experiences: IIMV, SEC, CFTC, AMF, CVM…]
– Investigation of price anomalies: exchanges, issuers, attorneys
• Monitoring division created in 2007
– Continuum supervision of transactions. Daily report.
– Updated follow up of national and international financial affairs
– Transaction analysis to detect price anomalies
• In 2007-08, 17 cases
• Reform of the SVS into a real Commission : the CVS
The D&S – Falabella merger case
• There had been rumors concerning this merger (or other ones in this area)
for long time.
• The merger would have been created one of the largest retailers in Latin
America (lately refused by Tribunal de Defensa de la Libre Competencia)
The D&S – Falabella merger case
• Early april 2007. First warnings. The issuer answered SVS requirements
officially saying (through an essential fact) that they had business plans
concerning their credit card business (association with a bank)
• May 9th prices started abnormal behaviour. Monitoring division warned the
respective areas at SVS. Press versions mentioned this particular merger.
• May 14th, both companies announced the merger
• May 14th, SVS asked both issuers to describe the merger process: timing,
people involved (over time, insiders and outsiders,…)
• Simultaneously,
–
–
–
–
Abnormal price movements of both companies started to be analyzed
SVS defined the critical period of privileged information based on issuers description
Databases were constructed (data from companies, brokers, civil register, 585 circ)
Suspicious transactions identified: abnormal previous investment behaviour (around 600
cases) plus eventual links with potential sources of privileged information
• Formal administrative procedures were open under reserve
• One year later the SVS announced several sanctions
• Critical role of assumptions: according to Chilean law, only one assumption
can be used to establish a case. Three general cases were sanctioned.
The D&S – Falabella merger case
Breach of duty of confidentiality
Use of privileged information
Board member of firm 1
Fellow board members of a third firm
(recognized a telephone conversation to justify not to
attend board in a third company)
(after communication: massive debt, portfolio
concentration, opportunistic acquisition of firm 1
shares)
Member of controlling group of firm 2
Recognized couple for several years
(asked to sign final agreement in the morning)
(acquisition of shares of firm 1 hours later,
benefiting him and also her)
Advisor to the merger process
Husband
(informed two days before announcement)
(acquisition of shares of firm 1 the day after)
The role of assumptions
FACT 1
Someone provenly has a
given knowledge that
can be considered
“privileged
information” if made
public
This person breached
the confidentiality
duty
FACT 2
Assumption
Someone provenly
acquired shares of a
company and does
so in a suspicious
way: increasing
indebtedness,
changing portfolios,
buying only after
some critical
decision was taken…
This person used
priveleged
information
Thought 1: to prevent or not to prevent,
what is the optimal?
Sanction-based
regulator
avoids black out
type of regulation,
excessive info
disclosures,
Optimal
Preventive regulator:
request information,
set rules, transparency
… (sanctions are
preventive…)
• Sanction based regulator: the regulator believes that
maket intervention may harm liquidity and therefore
inhibits itself to act. This regulator acts expost, once the
damage has been done.
• Preventive regulator: in order to prevent abuses and to
avoid undesired and unfair wealth transfers,rules are set
so as to induce insiders to behave properly. This may
however reduce liquidity if a significant proportion of
liquidity is provided by insiders.
Thought 2: Trade-off between efficiency, liquidity
and enforcement?
• Meulbroek (1992): El mercado detecta insider
trading y el efecto se ve rápidamente reflejado
en los precios.
– Si esta hipótesis es correcta, la prohibición de insider
trading sólo afectaría la liquidez del mercado y haría
los precios menos informativos.
– La no intervención del regulador permitiría alcanzar
mayor eficiencia de mercado pero el costo sería el no
evitar la redistribución de riqueza no equitativa (se
entiendo equitativo como “en igualdad de
condiciones”).
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Thought 2: Trade-off between efficiency, liquidity
and enforcement?
Overall Market Liquidity vs Liquidity provided by Insiders
18%
12%
6%
0%
3,0%
16%
2,5%
14%
2,0%
10%
1,5%
8%
1,0%
4%
0,5%
2%
0,0%
Thought 3: Do participants prefer markets where
enforcement is stronger?
• Hay quienes confunden flexibilidad del mercado
con laxitud del regulador.
– El enforcement reduce el costo de capital del emisor,
mejora la liquidez del mercado y aclara las “reglas del
juego”.
– Se atribuye lo contrario a la ausencia de
enforcement. No hay literatura que demuestre
claramente que la “ausencia de enforcement” pueda
ser percibida como beneficiosa, especialmente a
nivel de bienestar social.
Enforcement of insider trading:
empirical results and one practical case
Guillermo Larrain
Superintendente
Superintendencia de Valores y Seguros, Chile
Presidente, Comité de Mercados Emergentes, IOSCO
Conferencia “Foro sobre Modelos de Supervisión”
Organizada por la CNMV y el IIMV
Madrid, September, 2008