Insider trading in Australia: a critical and historical analysis
Australian domestic securities markets are presently more buoyant and resilient than ever before. Vis-a-vis foreign markets, the Australian share market proved less fickle and fragile in the wake of recent periods of heightened global uncertainty, and small investor participation in the domestic share market is at an all time high. Country-specific economic fundamentals aside, this high level of resilience and capital inflows is explained, in part, by the perceived veracity and integrity of our securities markets. The domestic continuous disclosure regime, in concert with extensive statutory regulation of insider trading, serve to promote and protect this level of market integrity.
It was not always this way. If small investors and foreign capital inflows are repelled from securities markets tainted by insider trading and other forms of market manipulation, Australian capital markets, until relatively recently, would have proved fairly unattractive. The burgeoning market economy of the 1980s, characterised by unprecedented levels of new stock issues, trading volumes and capital flows, induced unforseen opportunities for share market profiteering. The concomitant culture of greed and opportunism endemic in the securities industry resulted in the proliferation of insider trading and other techniques of market manipulation. The common law proved ill-equipped to adequately restrain such phenomena. The development of the law to the current state of market regulation was a gradual, reactive and often times painful process. The early application of fiduciary obligations proved awkward and dissatisfying in the context of impersonal and institutional securities market exchange.
The series of reforms which ensued were characterised by an uneasy tension between the competing theoretical justifications for regulation and the desire to maintain an optimal, yet restrained, level of market efficiency. Although not abandoned as a relevant consideration in the legislation, the notion of market efficiency, as outlined in this paper, became subverted to the egalitarian pursuit of “fair shares for all”. This paper explores the competing theories for and against insider trading, and traces the evolution of Australian legislation and common law in this area. Notwithstanding dramatic improvement in the position of the common investor and significant achievement in the promotion of market integrity, there remains a degree of confusion concerning the interrelation of the market fairness and market efficiency rationales. The latter interest is addressed first.