Insider Trading: Confidentiality hasn't found rightful balance

Insider Trading: Confidentiality hasn't found rightful balance
PRETORIA – Confidentiality is an honourable trait, but institutions are certainly not fanatical about it when their interests are at stake.

Looking back, just before and after 1994, we recall some remarkable insider-trading events that shaped our markets.

A close relative of insider trading is front running and central to both is confidentiality.

Confidentiality is an important and shared human value in Western bioethics and is included in international bioethical guidelines, including the Helsinki declaration. The latter is widely regarded as the cornerstone document on human research ethics.

As important as confidentiality is in human health matters, so ought it to be in human financial affairs.

Unfortunately, in South Africa large corporates have managed to convince our politicians that once things go wrong, their revenge-based interest trumps the right of privacy of an individual.

The large corporates have obtained the "right" to blacklist individuals who have been unable to pay what they had agreed to.

A private arrangement is transformed into free access for all to take note of those that have been named and shamed. An offender is punished without any financial benefit to the lender other than revenge. Confidentiality when most needed by the consumer is lost.

Ironically, in a recent study by Refinity – Innovation and the Fight against Financial Crime – it was found that 88percent of companies that were researched across the world said data privacy regulations are restricting their ability to collaborate against financial crime.

Share prices on the JSE increased, on balance, by 124.1 percent from October 1992 to February 1996. The price index of all classes of shares then reached a plateau and a net gain of only 1.3 percent was recorded from February 1996 to October.

A sharp but relatively short contraction followed and the average monthly value of all classes of shares declined by 6.3percent to December 1996.

Share prices steadied again in the first half of 1997, increasing by 10.6 percent from December 1996 to a new record high in June 1997.

During December 1993 an extraordinary event took place on the JSE. The All Share Index rose by as much as 52 percent in one month. From what I have gathered this had never before happened in the history of any bourse in the world. The reasons behind this extraordinary move have faded from most people's memory.

I also doubt if there was ever consensus of what exactly took place, with many theories. What we do know is that there were a few large losers and a few large winners.

It's a well-known fact the Sechold Group had large exposure on the South African Futures Exchange (Safex.) Its staff had written both out of the money puts and calls on the All Share Index. Their open position in the market exceeded 50 percent of the total open positions of Safex at that point.

When such a strategy is implemented, the writer of the options stands to pocket a substantial premium at no cost to him, provided the market does not move beyond the strike levels of either the call or put level.

The level of the strike was calculated with reference to the prevailing volatility levels. In Sechold’s case, it was implemented by a trader well respected by his peers. The late Stuart Rees was the first Safex chief executive.

Many of the practices in the South African derivative markets were conceived and implemented by Rees. It is said that Rees, incredible as it may sound, published the open position of Sechold in a daily newspaper. (Confidentiality, what confidentiality?)

In what soon appeared as a collusion between a few of the larger Futures players, they collectively started to push the market higher towards the inevitable level where Sechold would become a forced buyer to cover the written calls they had outstanding.

The end came quick. As the market soared, Sechold soon exhausted its capital reserves, which was also leaked to the community. The company defaulted and was later bought by Investec for an undisclosed minimal amount.

If these events took place in present-day US, many people participating and benefiting from this information leak would have ended up doing jail time.

The JSE acquired Safex in 2001.

According to the JSE, South Africa is ranked No1 in the world in terms of regulation of securities exchanges in the World Economic Forum's Global Competitiveness Survey for 2013-2014. This is an accolade for both the JSE and its regulators. Such confidential information would most definitely not become public knowledge via any action from the JSE.

Confidentiality has not found its rightful equilibrium in the financial world.

Business people thrive on inside information to gain an edge and a whisper here and there will remain common practice while woven into such information might just be a dose of fake information.

Corrie Kruger is an independent analyst.