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London Thrives In The Face Of Insider Trading

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by Yves Smith and Felix Salmon
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Jun 13 2007 12:00am EDT

London Thrives in the Face of Insider Trading

There's more to the difference between New York and London than just a philosophical disagreement over the question of whether rules or principles are the best way to regulate markets. In New York, it turns out, insider trading is easier to prosecute, and prosecutions are relatively common. In London, on the other hand, where plea bargains aren't allowed, it's very difficult to make insider-trading charges stick, and prosecutions are very rare.

A Bloomberg editor got needlessly snarky with their headline today, "FSA Struggles With Insider Trading That Doesn't Happen in UK": the FSA doesn't deny that insider trading is happening. But the story is pretty good when it comes to laying out the scope of the problem.

As John Carney notes, however, none of the insider trading seems to have done any harm to London's status as a financial center. And although it might offend peoples' sense of fairness, it doesn't necessarily damage markets. To the contrary, he says, "insider trading itself can make the market more efficient by increasing the amount of information in the market".

If insider trading gets too rampant, then investors will start to shun a market where what seems to be a good bid for their stock is reasonably likely to be, rather, an insider bid with advance knowledge of a forthcoming takeover approach. So it is incumbent on the FSA not to let insider trading get too blatant. On the other hand, it's quite easy to overstate the negative effects that insider trading can have.

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