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In the City
Insider trading
Nicholas Davenport
Another puritan revolution seems to be coming upon us — a natural reaction perhaps to current public scandals. I detect it in the correspondence I get, for one letter from a man who wanted Owenite workers cooperatives (and not any public unit trust) ended with the words: 'If it was not for God there would no no universe. If it was not for Jesus there would be no Welfare State'. I would have thought that the Master who said 'Take no thought for the morrow: Consider the lilies of the field' would not have approved of the ramifications of our vv. elfare state. Now it seems that puritanism ts even creeping into government White Papers, for in one of them it is proposed to Make 'insider trading' on the Stock EXchange a criminal offence. It will soon be considered immoral for a businessman to Make a decent profit. Keynes, who was a very active investor, taking bull or bear positions in all sorts of onunodities and shares, once said to me: Without insider trading there would be no market on the Stock Exchange'. I knew what he implied, for from all the information that came his way, he profited in the market as often as he could in a perfectly illegitimate trade. For example, a student of, is who married a whaler's daughter once said to him that the Hector Whaling ComPanY had built two new whaling ships and was going to catch a lot of whales in the Antarctic. Keynes looked into the current price of whale oil and decided that the shares Were undervalued. He bought a lot of them. The company's Antarctic catch came and u/..as Prodigious and the shares doubled in vdme. Now this was not secret information 13, n which Keynes acted. Hector Whaling had announced its Antarctic expedition and anyone could have taken a view about the Price of whale oil. But Keynes might have been caught out if the proposed alteration of company law had at that time been in action because an 'insider' had by chance spoken to him at a cocktail party.
It is certainly 'criminal' if a man make a killing on the Stock Exchange because he is privy to a company take-over or merger, or if a director of a company buys or sells his shares prior to an important announcement by the company — these scandalous acts are already forbidden by the Stock Exchange Council, but it is certainly not 'criminal' if stockbrokers and their analysts gather information about a company's affairs for the benefit of their clients or for the advice of fund managers. The critical point is whether the information they gather is also available to anyone who chooses to call on or telephone the company concerned. If it is — and it should not be given if it were not — there is nothing wrong in its dissemination and exploitation. Incidentally no financial column worth reading could be written without some inside information.
Mr Goodison the chairman of the Stock Exchange, who is naturally concerned that the proposed new legislation should not damage legitimate trading in shares, has made the reasonable suggestion that the investigations into any allegation of insider trading should be conducted by the Stock Exchange Council. The Council already monitors the market very effectively. It looks into about two thousand cases a year of unusual or extreme price fluctuations and is quick to jump on any doubtful practices. It would be ponderous and time-wasting if the judiciary had to call in the police if insider trading were to become a criminal offence. The Stock Exchange Council and the Council for the Securities Industry are already doing an excellent policing job. Of course, a free market in shares will always invite some funny business from time to time, for no businessman is a saint, but the best way to spot it and to prevent it is through a Council of wideawake trading stockbrokers.
At the moment we could do with a little harmless 'inside' trading in the City, for the share market is pretty lifeless. The FT index is down to 476, having been as high as 535 in September, and looks as if it will end the year no higher — or even lower than it was at the beginning. Mr. Healey is not helping the market by applying sanctions against any company which secures a contented work force by paying them more than the 5 per cent pay guide line. I am not blaming Mr. Healey, it is an unjust world, and many unfair things are done in private enterprise — for it is important that the Government should keep its public image intact —namely that it gives priority to the fight against inflation whatever unfairness happens.
What Mr Healey could do to help the stock market and revitalise private industry would be to copy some of the remarkable reforms of the economics minister in France. M. Rene Monory has just given a tax-saving inducement to investors who buy French industrial shares. They can deduct up to F.5,000 a year from their taxable income if they invest it in French industrial equities or in units of a unit trust holding not less than 60 per cent of its portfolio in French equities. The result has been dramatic. The French bourse has enjoyed a rise of more than 50 per cent this year while other European stock exchanges have been drooping. Of course, the fact that M. Monory abolished all price controls in the private sector gave an extra push to the rise. The buoyant market has enabled French companies to raise more capital through 'rights' issues — more than F.2 billion since September — while F.40 million daily of investment money has been pouring into the unit trusts. This is an 'industrial strategy' which makes good business sense — not like ours which is merely a lot of hot air. And it activates the best sort of insider trading.
At the same time M. Monory has been pleasing labour by compelling companies to distribute a small proportion of their capital to their employees, the government bearing part of the cost. According to The Investors Chronicle the number of shareholders in France has more than doubled — from 1 to fl million — since this new legislation was passed. Here is the beginning of the quiet industrial revolution which I have been advocating for so long —making the workers feel part of the industrial show so that they have an incentive — through rising dividend incomes — to increase their productivity. I called attention last week to the remarkable revolution which is being carried out in the US through ESOPs (employee stock ownership plans). Britain as usual is being left far behind in this drive for industrial copartnership. But I would not be surprised to see Mr Callaghan make a sudden call for it if, and when, he is confronted with his first critical strike in the public sector.
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