While insider trading numbers are small, Aitken says his new report provides the first real estimate of integrity in global markets. “The point is that insider trading could be increasing or decreasing and no-one knows,” he suggests.
Research measuring market fairness is scant globally. ASIC has announced the measurement of market quality (which includes estimates of fairness and efficiency) as a top strategic research priority. However, the lack of insight to date is odd as the fairness of markets is pivotal for optimal market design, observes Aitken. “At best, this has meant that regulators [have] had only half the evidence to determine whether the changes they are approving actually improve the market or not,” he emphasises. “As this is the first time they’ve ever had these particular integrity estimates, how can they know the extent of the problem?”
Australian regulators face particular difficulties identifying insider trading because the trading records of the Australian Securities Exchange do not show who’s trading. “If we had that information in the trading records, insider trading would be easy to identify and eradicate. The regulator has recently asked for that information to be supplied, but there’s a lot of resistance from industry,” notes Aitken.
Market manipulation is less of a problem than insider trading, according to Aitken’s report. As a percentage of trading it is 0.0391% of total turnover. This looks small, yet the Australian figure is still unacceptably high when compared to North America (0.0051% of total trade for the 2012 first quarter), Europe (0.0164%) and Asia-Pacific (0.0171%).
Aitken draws the distinction between market manipulation and insider trading: insider trading is essentially where someone has access to information, whereas with market manipulation there’s no information, but people act as though there is after seeing unusual activity on the market.
Aitken is unimpressed by the supposedly better figures offshore. “While offshore markets appear to be fairer and cheaper for trading, we don’t know why that is since there has been no systematic study of the market designs of these various markets,” he says.
An important question is how the aspects of efficiency and fairness interact. For example, if fairness (as measured by the instances of bad behaviour) rises as efficiency drops, then clearly there is a problem no matter how low the cost of trading, Aitken suggests. There is evidence of a correlation between markets that are less fair and markets that cost a lot more to trade in. “If people think a market can be manipulated, prices will blow out and transaction costs will be higher. One could argue then it’s dearer to trade because people feel that the market is more ‘rig-able’, so people will price-protect themselves in such markets.” This may be why the cost of trading is higher in Australia than in other markets, hypothesises Aitken.
Using relative effective spread (between the bid and the offer price) as a measure of trading costs, Aitken shows that trading costs are 23.38 basis points in Australia, compared to 6.37 and 12.41 respectively for the US and Europe, with Asian markets trading costs sitting at 27.90 basis points.
What drives these differences? Aitken believes Australian regulators have made choices that have led to a less desirable market design than others around the world as evidenced by higher transaction costs and lower fairness scores. “We need to go back and look at how other markets that are more efficient and fair are structured before restructuring ourselves to ensure these figures come down over time,” he says.
