Advanced Search

The Stock Exchange - The Stock Exchange and Security

From the discussions so far, it might be fairly obvious that there is the scope for the market system to be abused. For example, people may have access to information about future decisions of a business that could affect its share price and make use of that information to make transactions that will benefit them financially.

Part of the reason for the possibilities of this happening is that companies change - staff can move on, new staff can be appointed, suppliers may change, fashions may change and so on - all of which causes the value of a company to change. The principle of a joint stock company is that it is owned by a group of individuals all of whom contribute a joint stock of capital for the purpose of allowing the business to make a profit. There might be hundreds of thousands of shareholders in a company most of whom will not know each other and will never meet! It is imperative therefore for the security and integrity of the Stock Exchange that company dealings are transparent. This means that every investor has the right to be informed about decisions and issues related to the company at exactly the same time.

You may have heard of companies making an announcement to the Stock Exchange at 7.00am about something - this is exactly what this means - at that time the announcement will be made so every shareholder has the opportunity of accessing that information. Before that time, the information must be kept secret and not shared with anyone outside the immediate organisation. This puts a lot of responsibility on the security systems in firms and the senior management to ensure that information remains secure at all times.

In many cases this can be very difficult. If, for example, a firm was planning to merge with another firm, hundreds of people from management to members of staff at both firms to legal advisors, staff at investment banks and so on might be involved in the initial plans before any official announcement is made. Any one of these people could inform a friend, relative or colleague of the news and this could enable the person who received the information to take advantage of the situation by buying shares prior to the announcement on the expectation that the announcement will result in a rise in the share price.

Image: The amount of information available in the market is now extensive - including regular updates about news of world events and what is happening in financial markets and companies around the world. Making sure that sensitive information is kept secret until it is ready to be made public is of paramount importance to the security and integrity of the London Stock Exchange. Source: Proquote

Other cases of abuse might involve attempts to manipulate the market. This might occur if misinformation is circulated in a deliberate attempt to influence the market. For example, most people involved in dealing in shares and all sorts of financial instruments will be aware of the impact of external events on companies and economic activity. The market relies on accurate and wide ranging information to make judgments about what might happen to prices.

For example, if Iran decided to develop a nuclear arms capability despite attempts to negotiate it might be feasible to assume that the West might react to this news. There could be a possibility of sanctions being imposed on Iran and in retaliation, the Iranian government might decide to cut oil supplies to Europe. It is likely that oil prices would rise as a result and this would cause fuel costs for airlines to rise substantially. It is quite possible that the share price of British Airways and other airlines would fall quite significantly.

Getting accurate information about what is happening in Iran therefore might be very important. The effects on the market as a result of misinformation could therefore be very important. Co-operation between all the regulatory bodies throughout the world is important in helping to ensure that such misinformation does not occur.

To prevent such fraud occurring, the Financial Services Authority (FSA) have been given powers to act on cases of so-called 'insider trading' and other acts where there is suspicion of fraud. Such cases can often be complex and proving them is not easy but the FSA is seeking to take increasingly strong steps to use the powers it has been given to reduce the amount of such fraud.

Index | Previous | Next