When ordinary information turns dangerous
Rules to stop insider trading are well intentioned, but can stop markets functioning properly by making the ordinary exchange of views, gossip, colour and rumour dangerous. Reacting to information is exactly what markets are about.
Markets are all about flows of information. On any given day, the securities that trade the most will be those where new information has come to light — an earnings report, a new boss, an acquisition, a cancelled contract, politics, wars, coups, more politics, and so on to infinity.
So anyone attempting to overhaul how information should spread ought to tread carefully.
Two major parts of the regulation threaten to stir up ordinary market practice, or garland it with extensive disclosure, bureaucracy and record-keeping requirements.
The first is a new rule on investment recommendations, which, according to some versions, will keep salespeople, syndicate managers and others from expressing their opinions about which securities look cheap or expensive.
There’s no outright ban, but comments which express specific price opinions on securities will need to be packaged with research-style disclosures, and the history of previous opinions available to curious clients.
Even runs of comparable bonds for a new issue, according to some interpretations, could count as investment recommendations.
This turbocharges the weirdly sterile regulatory view of markets.
In this odd world, investors are all head-down fundamentalists taking all of their views from earnings calls, and a perfect summation of all buy-hold-sell recommendations. Traders sit between investors and pass securities between them, for a stable and modest spread.
There’s none of the rich layer of gossip, relationship and rumour that makes markets so sensitive to information from all sources.
Everything from a raised eyebrow in a pub to the most complex of Monte Carlo models goes into forming market sentiment, and information is a far more fluid and liquid currency than the simple exchange of securities for money. Attempting to dam the flow, or to tabulate every single exchange of price views, is a pointless and damaging enterprise.
The second big area that the rules affect is market soundings.
This has always been an area of delicate treatment where insider information is involved — the art of arranging banks is to accurately gauge demand for a particular issuer, without ever giving away the issuer in question or its exact intentions. Investors also have a thin line to walk — offering help, achieving pole position for allocations, and a greater understanding of the market, without locking themselves up.
It’s about to grow more delicate, as, once again, banks and investors wish to avoid becoming mired in disclosure obligations. Easier than keeping detailed records of each potential disclosure is to simply steer away from anything close to the line.
More controversial still is information handed out during a bookbuild.
While this was not originally part of the new MAR regulation, it has been inserted by the back door — ESMA, the regulator in change, put it into the technical standards and guidelines. So book sizes, for example, must be publicly pushed out to the market.
This is good practice anyway, even if not honoured religiously in every sub-market, but it threatens to clamp down on ordinary, healthy salesmanship.
But the really damning thing about MAR is that it fixes a problem few people knew they had. Nobody anywhere in the market was clamouring for a clampdown on market colour, and the constituency for tighter compliance on new issues was similarly limited.
Far more effective than reams of disclosure is the incentives on each side of the table. Private side bankers get paid by issuers, and not by allowing their public side colleagues to front-run the trade. They know that premature leakage of information matters, and how much, and when. MAR bolts a door which, for the most part, was already barred.