Company directors have found a 'creative' way to profit from insider trading

The Australian Security Exchange (ASX) is home to "rife" insider trading, according to new research. Company directors and associates over the last decade had engaged in a campaign of contrarian trading - buying or selling against market moves - based on inside company knowledge, according to the research.

"My results show these contrary trades were being made with non-public knowledge, privy only to company insiders, about the future performance of the firm. This most certainly amounts to insider trading under the law," the researcher said in a release issued to Business Insider Australia.

However, while insider trading is generally considered to be trading on a company development that takes place before it becomes public, the researcher identified an opposite trend. "If the news had the potential to boost the share price, I found the directors were selling their shares when normally, this is the time you'd expect them to be buying," he said. That allowed the trades to fly under the radar of regulators like the Australia Securities and Investments Commissions (ASIC). Interestingly, the findings showed that while such trades occurred across the entire market, they were most prominent in the mining sector - an industry prone to speculative buying and selling.

"In the safe knowledge of what's coming in the future for their firms, these company directors are confidently trading in the opposite direction, which ultimately helps tip the share price back again," the researcher said. "The practice is both creative and criminal."

Due to its nature, there isn't believed to have been a single prosecution of such trading, because the information was considered public at the time of the trade. However, the researcher said the practice allows directors to sell when share prices became overinflated and buy when companies became oversold, according to their inside perspectives.

ASIC disagrees and said the practice isn't breaking the law. "Although we have yet to examine the research in detail, the announcement suggests it is based on a very different concept of what constitutes 'inside information' and 'insider trading' than applies in any comparable market anywhere. That is, that most directors are trading on inside information whenever they trade, breaching the law simply by virtue of having an intimate understanding of the business. By extension, this suggests that all directors should be prevented from owning shares. This proposition would be contrary to common market practice here and elsewhere."

ASIC's contention remains that trading with public information is entirely above board, and no different to what other investors do every day. By trading against news flows - selling on positive news and buying on negative developments - directors could be said to be simply valuing the company's long-term prospects rather than the short-term price fluctuations.

Source: Business Insider Australia, Sep 23, 2019

The question is Discuss the ethical issues raised in this story related to Market integrity.