Who's inside and who's not is a confusing question

By Mike Ross

Friday 12th May 2000

SEEKING DEFINITION: Stephen Franks

Increasing internet use is complicating proposals to regulate insider trading. Information on the internet is available for wide dissemination, raising arguments that price-sensitive information posted on the net becomes public in an instant and from that point no-one can be trading as insider.

Chat rooms, bulletin boards and e-mails quickly disseminate price- sensitive information.

Act New Zealand MP and former member of the Securities Commission, Stephen Franks, points out that regulations controlling insider trading need a definition of "insider" and must distinguish between public information and non-public information.

The internet revolution is forcing securities regulators worldwide to rethink the bounds of insider trading.

Countries regulating insider trading typically work with very opaque definitions: non-public information is information not available to the general public.

The US courts have never been willing to set out a blanket rule. Disclosure alone is not enough. There must be dissemination and absorption.

The rule of thumb has been that information is public once released by the Stock Exchange and published in the media. But traders dealing in shares the instant a Stock Exchange release is made have been treated as insiders.

Courts have variously ruled that traders must wait until 15 minutes after a stock exchange release or after daily papers publish next morning.

These rules were established pre-internet. Now millions more have an internet connection than ever read a daily newspaper.

Companies can post their results on the web, making them available long before publication in a newspaper. In Japan, companies are prohibited from post-ing price-sensitive news on the web before publication in a daily newspaper.

In the US, the Securities and Exchange Commission (SEC), which is responsible for enforcing that country's insider trading rules, has consistently refused to set out rules as to when information has become "public".

Even in the absence of any "old" rules, there is a call for new rules to reconsider what is public information.

Professor Robert Prentice, from University of Texas business school, argues the internet creates so many new channels for disclosure and dissemination that notions of what is "public" have to be reconsidered.

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