Sometimes, the information regarding a listed company or any significant subject related to it reaches only a part of shareholders or some that don’t even hold shares in a company.
“I spoke with a friend, and he told me that is a good timing to buy shares in company X because…. For sure this will happen. He knows it from inside.”
Sound familiar? Have you heard this in a coffee shop from your chatty neighbor? Or even worse: have you been part of such a conversation?
In 1814, Charles de Berenger landed in Dover disguised as a Bourbon officer, proclaimed the death of Napoleon, including in a letter transmitted to the Admiralty in London, using the latest modern technology at that time (the semaphore telegraph). He and his associates had bought gilts in the weeks before and made £0.5m (more than £70m today) in profit as the market rose on the fake news. The conspirators were prosecuted.
The market abuse may take place in two ways:
1. Insider trading
The use of inside information to deal (or attempt to deal) in relevant financial instruments, recommending or inducing another person, based on inside information, to deal in such instruments and the improper disclosure of inside information are crimes. Who are the ‘criminals’ in coffee shop example above? The two speaking in the coffee shop, the ‘friend’ that disclosed insider information, the employees of the company that delayed the public disclosure of the inside information or the employees that decided that there is no privileged information as there is no certainty that the event will take place.
2. Market manipulation – here situation is a bit different as there is no need to have a transaction and on order to trade.
The market manipulation needs a behaviour that may give false or misleading signals. There are two examples that may be easily recognized in real life situation
- The management of a company publishes a report which gives or is likely to give false or misleading signals regarding the activity, the value, the price of the shares issued by the company or by a related financial instrument. After the dissemination of information price on the market increases, and the management obtains (directly or indirectly) benefits.
- A public person criticises a company and price on the market decreases significantly. After it, the same person or a related one buys shares in the company.
Is market abuse only ignorance?