Saturday, September 25, 2010

Why Insider Trading Is Hard to Define, Prove and Prevent

Excerpts via Knowledge@Wharton.
While insider trading cases come along fairly frequently, their volume is minor compared to crimes like murder, rape and robbery. But that doesn't mean insider trading is rare. Orts says numerous academic studies indicate quite the opposite by uncovering indicators like spikes in a stock's trading volume just before key information, such as quarterly earnings, is made public. "There are a number of studies that indicate a lot of insider trading is occurring," he says, adding: "Usually there is a radical increase [in trading] before the public announcement of the event. So the question is: What is explaining that increase...? And the best explanation is that somebody is getting the information ahead of the news."
Insider trading does not leave clear tracks, like a bloody victim or empty safe, so cases can go undetected. "It's hard to know how much criminal conduct goes on in the world, especially in the white collar world where there's a lot of protection of secrets," says Alan Strudler, professor of legal studies and business ethics at Wharton.

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