The methodology should enable the FSA to measure, over time, its success in tackling market abuse, one of its key aims. This is part of the FSA's drive to establish key indicators that will help it understand better how successful it is at achieving the intended benefits of regulation.
Hector Sants, FSA Managing Director, said:
"Our future success in reducing market abuse should be measured not by gut feel or fines levied, but by using a robust, analytical tool that will stand the test of time.
"The methodology we have developed gives us such a tool and is an important step forward in establishing the starting point against which the FSA's future work in tackling market abuse should be judged."
The analysis
The researchers analysed two kinds of market announcements: those relating to take-over bids in 2000 and 2004 and announcements about the trading performance of FTSE 350 listed companies between 1998 and 2003 - around 1500 announcements in total. They then examined announcements that led to a large or abnormal share price movement since these are the announcements most likely to contain information of use to an insider trader. They then assessed the proportion of such announcements that, in fact, were preceded by an apparent "informed price movement" that could mean that some trading on unpublished information occurred.
Results
The analysis of FTSE350 announcements covers a period before the Financial Services and Markets Act (FSMA) came into effect, and a later period, when FSMA was in force but the FSA had yet to complete any enforcement action against market abuse. The analysis indicated that there was no change in market cleanliness in relation to announcements by FTSE 350 listed companies. The analysis of announcements relating to takeovers included 2004, when five misuse of information cases were completed, and showed that there was a small but statistically significant increase in informed price movements suggesting a deterioration in market cleanliness.
Hector Sants noted:
"The analysis shows that there was no improvement in market cleanliness in the period after the introduction of the FSA's new powers, and before any high-profile enforcement cases were concluded. This suggests that visible enforcement action may be the key tool in our work to reduce market abuse."
The first enforcement cases in relation to misuse of information under the new rules were concluded in 2004 and resulted in comparatively low fines. These are the only cases in the period analysed in this research.
The results do not show exactly how much market abuse is going on but the researchers detected price movements which suggested that some informed trading may have taken place prior to 28.9% of the takeover announcements and 21.7% of the FTSE350 trading announcements which were identified as being most likely to contain information of use to an insider trader.
Future Work
The FSA intends to repeat the analysis later this year for later periods. If this future work shows a change in the level of the measure for takeover announcements of more than four percentage points (up or down), this would indicate a change in the frequency of informed trading. Similarly, a change in the FTSE350 announcements measure of more than eight percentage points (up or down) would indicate a change in the frequency of informed trading.
The FSA is keen to receive feedback on its methodology from interested parties.