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‘Rife’ ASX insider trading is ‘flying under the radar’: report

Australian company directors across the board are engaging in indirect insider trading, a new ANU report has found. (AAPImage/Jeremy Piper)
Australian company directors across the board are engaging in indirect insider trading, a new ANU report has found. (AAPImage/Jeremy Piper)

Australian company directors have been slammed for insider trading on the Australian Securities Exchange (ASX), according to a new Australia National University report.

According to research led by ANU College of Business and Economics senior lecturer Dean Katselas, industry trading was found to be ‘rife’ among Aussie company directors across all industries.

The research analysed trades made by company directors after good and bad news announcements across 10 years between 2005 and 2015 and found that directors traded contrary to the sentiment of the news – that is, good news meant shares were sold, while bad news saw shares snapped up.

“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,” said Katselas.

“This most certainly amounts to insider trading under the law.”

The trading was the “exact opposite” of what you’d expect after seeing either good or bad news, he added.

“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.”

Why hasn’t the corporate watchdog caught this yet?

The Australian Securities and Investments Commission (ASIC) only prosecutes cases of insider trading that’s made ahead of public announcements, meaning suspicious trading that happens after news has been made public means insider trading flies under the radar, according to Katselas.

In this regard, ASIC and the ASX have a blind spot, he indicated.

“This indirect insider trading is quite difficult to identify and therefore to prosecute, because the ASX and ASIC are effectively looking in the wrong place.”

‘Creative and criminal’

This form of insider trading was both “creative and criminal”, the researcher said.

“In the safe knowledge of what’s coming in the future for their firms, these company directors and many of their associates, are confidently trading in the opposite direction, which ultimately helps tip the share price back again.

“There hasn’t been a single individual or company identified as breaking the law by trading in this fashion to my knowledge because it’s generally accepted that the information is public.”

The research also shows that the practice was common in all sectors, including mining, healthcare, pharmaceuticals, consumer, and other services.

“You name it, the directors of most companies on the Australian stock exchange are engaging in this illegal practice.”

With this type of insider trading, companies that are doing poorly end up demonstrating the greatest profitability as a result of the negative trades, Katselas added.

Speaking to Yahoo Finance, an ASX spokesperson said prosecuting people for insider trading was a matter for ASIC, not the local bourse.

ASIC, as the regulator, has responsibility for monitoring real-time trading and prosecutes alleged insider trading as an issue under Corporations Law rather than an ASX matter, Yahoo Finance understands.

Yahoo Finance also understands that ASIC publishes semin-regular market health reports in this area and the most recent one was published in late July.

Yahoo Finance has contacted ASIC for comment.

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