Database Reference
In-Depth Information
Stock Surveillance
The regulations of insider trading also vary
from exchange to exchange all over the world.
In most exchanges, insider trading is regarded as
severe and illegal, and insiders are often punished
with imprisonment (Fishman & Hagerty 1992,
Garfinkel & Nimalendran 2003). An interesting
issue is that there are always debates on whether
insider trading should be prohibited. Some fi-
nancial researchers argue that insider trading
benefit the stock markets by providing liquidity
and should not be banned. However, most of the
financial research proved that insider trading
impair stock markets and should be prohibited
definitely (Leland 1992).
Stock surveillance plays a vital role in ensuring
market confidence by providing continuous, real-
time monitoring of activity in the equities and de-
rivatives markets (Schinasi et al. 1999). However,
stock surveillance also faces many challenges.
Surveillance needs to detect any suspicious trad-
ing from the rise and fall of prices and volumes of
stocks. There are various types of illegal trades and
breaking of rules and regulations in stock markets.
The stock market surveillance is responsible for
the detection of these behaviors. In particular,
surveillance monitors for two key market abuses,
insider trading (Bettis et al. 1998) and market
manipulation (Aggarwal & Wu 2006).
Stock Market Manipulation
Insider Trading
Stock market manipulation is another kind of
market abuse. It describes a deliberate attempt to
interfere with the free and fair operation of the
market and create artificial, false or misleading
appearances with respect to the price of, or mar-
ket for, a stock. This is typically done either by
spreading false or misleading information in order
to influence others to trade in a particular way, or
by using buying and selling orders deliberately
to affect prices or turnover, in order to create an
opportunity for profit (Allen 1992, Felixson &
Pelli 1999).
The following is a case of market manipula-
tion in HKEx. Three manipulators were proved
to have conducted market manipulation on the
GP Nano Technology Group Limited. The SFC
investigated the case and found that they bought
and sold the stock of GP Nano at the same price,
and sometimes they bought the same stock at a
higher price and sold at a lower price from 18th
January 2002 to 11th June 2002. They also made
frequent intra-group trades among themselves.
Their intentions were not to trade normally, but
to make a false impression of active trade for GP
Nano Technology stocks and attract others to invest
on the stock. These market manipulation trades
led to the increase of turnover of the stock. As a
There are different definitions of insider trading in dif-
ferent stock exchanges. Generally speaking, insider
trading is the trade based on non-public information.
The insiders normally refer to managers, directors,
employees or major shareholders of companies who
own the undisclosed inside information. The inside
information refers to the company announcements,
annual reports or other news which have significant
influence on the movements of stock (Minenna 2003,
Szockyj & Geis 2002).
A real-life case of insider trading in Hong Kong
Stock Exchange (HKEx) is as follows. Taylor Ho,
the financial controller, company secretary and an
executive director of Ngai Hing Hong Company
Limited (NHH), bought 1 million NHH shares
on 21st July 1995. He knew that the Annual Re-
port for NHH would have positive impact and
the price of NHH would rise. In fact, when the
Annual Report of NHH was announced on 18th
July 1995, the price increased significantly. In
the following day, Taylor sold NHH shares and
made much profit. As a result, the Securities and
Futures Commission (SFC) investigated the case
and proved that Taylor made insider trading and
Taylor was fined HK$1,000,000.
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