Institutionalizing Insider Trading?
Posted by RV Raman
Insider trading, I’ve often thought, must be one of the easiest white-collar crimes to pull off. Even easier than procurement fraud, which must be one of the most pervasive.
Someone in the accounts department of a listed company tells his friend or relative: ‘We’ve done better than expected this quarter. We’ll beat market expectations.’ The friend promptly buys a hundred shares of the company. And when the results come out and the share price surges, the friend is a few thousand rupees richer.
Now, how do prosecutors even begin to establish that price-sensitive information was used to profit from the trade? Unless, of course, the insider was foolish enough to put his tip on an email or a text message. Not only is insider trading easy to pull off (at least on a small scale), it is also horrendously difficult to prove.
There are tens of thousands of people in listed companies who possess such price-sensitive information from time to time. It’s not just the blokes in the accounts department, but also others too – both employees and outsiders (auditors, consultants, I-Bankers, advisors, etc.).
During my tenure at the Big Four audit/consulting firms, this was something we had to constantly look out for. The law explicitly prevents auditors and consultants from divulging such information – inadvertently or otherwise – to any party who may benefit from it. And we were prohibited from owning stocks of companies we audited or advised. Independence/propriety is indeed a big deal at these firms.
Be that as it may, many do believe that insider trading is prevalent in India. On a small scale, at least.
A couple of years back, I was wondering how insider trading could be ‘institutionalized’ (by a hypothetical Indian Prof. Moriarty, if you will) and scaled up. I sat down and ‘designed’ a suitable mechanism. To my delight, I found the scheme eminently workable, and reasonably watertight. And more importantly, it could be implemented with simple technology that is widely available.
I then put on another hat (that of an investigator or SEBI), and began looking at how one would go about discovering and unraveling the insider trading scheme once it was implemented. Clearly, that would require sifting through tons of stock market data, and possibly the use of analytics.
Once I had both ends of the scheme figured out, I built a murder mystery around it. That became Insider, the novel that Hachette has just released. If you do get to read it, please drop me a note. I’d like to hear what you think of the workability of the little scheme.