1. Introduction:

The stock markets are often shrouded in mystery, investors can't solve this mystery unless they surf swelling waves of volatility and understand the rules of “insider dealing” and “price sensitive information”, in order to achieve financial success. These days the decision to invest in shares of common stock is a huge step; since we are witnessing profound and significant changes in the global market. In various ways the global investment landscape is far different than it was 20 or 30 years ago.

This paper will critically assess the importance of how the rules on ‘price-sensitive information' and ‘insider dealing' have evolved for securities markets through their effects on the markets. These effects are realized through the relationship between insider dealing and price-sensitive information, their influence to the stock market and the role of securities markets. This paper is organized in the following manner. The first will shortly review the overview of insider dealing and price-sensitive information. The next part will provide an assessment of the list main rules on both. The thirdly, will present the evolvement of ID and PSI and their affect to market. In sum, it will be followed with the conclusion of this research paper.

2. The overview of insider dealing and price-sensitive information

Security trading is one of the areas that have observed recently dramatic converts.

2.1. The definition of insider dealing

Perhaps a generalized exertion of defining “insider dealing” would be the practice of buying or selling of a security through someone who has an admission to non-public information's about a certain security that may have dramatic consequences on the market securities and prices, and use these changes for their personal advantage.

However, the major question that most people are mystified with is weather “insider dealing” is considered a criminal offence?

Well it may be both legal and illegal depending on the time the insider makes the deal. Insider dealing is legal when the information is completely public; at that instant, the insider has no subvention over other investors. However, insiders are forced to report their operations, so investors can check their reports to make sure that insiders are lawfully trading their stocks.

On the other hand, it is still illegal for insiders to gain unfair benefits by using their wisdom of knowledge that haven't been proclaimed through trading operations.

A familiar scenario in which insider dealing appear illegitimated may involve declaring a statement made by a corporation of a specific lucrative year, to use such announcement in emerging the shares value in the market, and make them extra profitable to sell.

Another example, some corporate officers trade shares after finding out confidential corporate information, they make the trade without reporting the information they discovered. In this case the only way that anyone could discover encounter the crime would be, long way after the crime occurred.

The government uses certain rules and regulation to control insider dealing to prevent abuse. In the UK the Financial Services and Market Act 2000, classify the “insider-dealing” as illegal and inequitable to trade based on enigmatic unpublished information. Even with the government rules, it can be extraordinarily tricky to discover insider dealing when it happens.

Understanding the reasons that makes insider-dealing misappropriation unethical has several important implications; as the further, you distinguish why illegal insider dealing is a crime, the further you'll understand how the market works. On the other hand, understanding clearly insider issue will help to understand insider dealing due to (who constitutes an insider) is crucial to the whole definition of insider dealing.

2.2. The definition of price-sensitive information

The government seeks the best ways to secure fair distribution of information.

However, the “price sensitive information” will eventually have a huge impact on a companies' share price. Every company should have the ability to recognize every single detail that may have an effect on the future reported earnings per share: Borrowing, pre-tax profits and other factors that influence the share price. Some facts must be announced to the market, as they may be price sensitive, they include profit warnings, dividend announcements, annual and interim results, acquisitions, and disposals above a certain size and other of securities.

Regarding to Bloomsbury (2007) price-sensitive information is unpublished information that will affect to the share price of a company.

The UK law was extended to a cover a wide range of securities and derivatives.

Two main principles underscore the entire obligation set in the UK:

- All investors are supposed to be treated equally.

-All related information should be revealed on a timely basis.

These principles are planned to guard stakeholders. Stock markets need a flow of punctuated and timely in sequence to operate in a good way. Corporations have the aim of both informing the market and achieving their duty. Even though, it has been observed still after the information has been announced, some investors react earlier than others do.

2.3. The list of main rule on Insider and price-sensitive information

Main rule on Insider dealing:

  • Where an insider or tippee (an individual who receives tip and has the insider give information) dealt in securities.
  • Where another party was counselled or procured by either an insider (or a tippee) to deal in securities.
  • Where an insider or a tippee shared insider information to another person, and if that information was being used for dealing or for counselling or procuring another party to deal.

Main rule on price-sensitive information:

The Listing Rules place a general duty on companies to release certain information that is unpublicised information. This may lead to a considerable movement in the price of its securities.

  • Information must always be given to the market as a whole, by an announcement to the Company Announcements Office. Companies are free to use additional media, but selective disclosure of price sensitive information, without an announcement, is never acceptable.
  • A company's regulatory obligation is thus to ensure that information which emanates from itself, its advisers or agents is given to the market as a whole and is sufficient and not inaccurate or misleading.
  • The Listing Rules permit the Exchange to grant a dispensation from the requirement to make an announcement where disclosure of the relevant information might prejudice a company's legitimate interests. This dispensation will only be granted in very limited circumstances.
  • It is not feasible to define any theoretical percentage movement in a share price which will make a piece of information price sensitive. Attempts at a precise definition of ‘price sensitive' are not possible, since it is generally necessary to take into account a number of factors specific to the particular case, in addition to the information itself, which cannot be captured in a mechanistic formula. These include the price and volatility of the share and prevailing market conditions. No such definition is included in the relevant legislation.
  • However, price sensitive information will potentially have a significant effect on a company's share price. In particular, a company should be able to assess whether an event or information known to the company would have a significant effect on future reported earnings per share, pre-tax profits, borrowings or other potential determinants of the company's share price. The Listing Rules indicate many events which have to be announced to the market because they may be price sensitive. These include dividend announcements, board appointments or departures, profit warnings, share dealings by directors or substantial shareholders, acquisitions and disposals above a certain size, annual and interim results, preliminary results, rights issues and other offers of securities. In other areas judgement will necessarily be required. This guidance seeks to assist in these judgements by conveying the spirit within which investor communications are to be conducted.
  • Companies should remember that, in general, the more specific the information, the greater the risk of it being price sensitive. For that reason, companies should not disclose significant data, least of all financial information such as sales and profit figures, to selected groups rather than tothe market as a whole. Even within these constraints, there is plenty of scope for companies to hold a useful dialogue with their shareholders and other interested parties about their prospects, business environment and strategy (particularly in the medium and long term).

2.4. The evolvement of insider dealing and price-sensitive information

Brazier (1996) present that insider dealing did not be converted into a criminal offence for the first time; nevertheless, in the Company Act 1980 this have changed as insider dealing was divided into three fundamental criminal offence include where an person in possession of insider information dealt in securities

Laurence (2001) indicates that there was an expanse in definition of insider through Company Securities (insider dealing) Act 1985 such as this rule makes outsider advisors more responsible with their performance to the firm in dealing in a stock or recommending it to others.

On the other hand, there is a considerable change to insider dealing in the UK by new legal in thecriminal Justice Act in 1993 causing the European Community in 1989 passed a guiding making insider trading illegal in all countries (Laurence 2001)

According to Keenan and Denis (1993) demonstrates that with the company Securities (insider dealing) Act 1985 will be completely repealed by the new rules in 1993, which expand the range of existing lawmaking to all securities markets. In order to comprehend the new rules, Laurence (2001) indicates that inside information was defined as price-sensitive information that relating to particular issuer of securities in general; in addition, the definition of an insider as person with ‘‘directs access'' to inside information, rather than someone who connect to the firm.

In respect of the criminal Justice Act in 1993, indicates that the target to make these new rules through the process of attempt to codify a number of unwritten rules and clarifies the Listing Rules (Miller 1995). Moreover (1994) investigates that the stock exchange not only publish the guidance on the price-sensitive information for the company, but also want to observe possible changes in the Listing rules. In summary, the key aim of the Stock Market exchange is guarantee potential price-sensitive information is released immediately to the stock market due to the false market that created by uncontrolled in release of price-sensitive infsormation (Miller 1995)

Institute of Chartered Accountants (1994) demonstrates that Stock exchange have investigated possible change to the Listing Rules so that clarify a firm that is keeping the market appropriately informed only has a regulatory duty to correct misconceptions when the source of the error is itself or its agents.

However, Institute of Chartered Accountants in England and Wales (2002) demonstrate that in FSA has published the new rules and proposed changes to the listing rules at N2 which summaries in the papers CP 100 and CP 100a with the Guidance on Price-sensitive information. For instance, FSA has not continued with the proposal to demand a firm to make an announcement to the market, if a director or appropriate employee has offend the code of dealing in the firm. In fact, the role of the Model Code continue and interaction with the Listing Rules. In summary, The FSA point out that Price-sensitive information Guide is now guidance within the term of the act.

The Financial Services Authority (2008) propose the new listing rules on the London Stock market in order to allow companies have benefit from London listing without having follow the high UK corporate governance standards.

3. The history of stock market relate with both rules

One explanation of how insider dealing has affect securities market in the UK is the concept of an adviser to a firm involved in a takeover. For example, Geoffrey Collier is head of securities at London finance house Morgan Grenfell who advise on a takeover bid. In 1986, when the bid was about to be launched, Collier arranged the acquirement on his own behalf of the share of the target company in London that through a firm registered in the Cayman Islands earlier to the announcement of the bid. This led to he was convict on pleading to insider dealing (Brazier 1996:78).

Recently, Daley (2005) indicates that ‘‘Mr Morgan bought 20,000 share in Viglen which is a technology stock in January 2000, shortly before the company was tipped in the paper's City Slicker column''. This led to the price of share soared. Furthermore, two of his journalists were found to have bought share in the same company with Mr Morgan bought. This arise a serious issue over partiality of the advice being presented.

According to laws about deal with trading on insider information, journalists have no legal provisions dealing with the concept of share purchases like the case of Mr Morgan. Because, some newspapers have a column in which they advise to their customer certain shares as being a good investment. This concern of main newspaper could be argued to be price-sensitive due to a strong writer in the column may be a reason causing significant buying of share of these companies. This will leading to the rise of the share price. Furthermore, Gallant and Epworth highlight that ‘‘PPC Code of Practive includes a provision that journalists must not buy or sell...share or securities about which they have written recently or about which they intend to write in near future'',

Source: Essay UK - http://turkiyegoz.com/free-essays/finance/the-stock-market.php


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