Research by one of the country's leading university claims that insider trading is rife on the ASX with company directors gaming the system and effectively ripping off ordinary shareholders.
The stunning claim by the Australian National University researcher Dean Katselas has been reported by several news outlets, including the ABC, and will alarm most ASX investors.
The study looked at 50,000 trades made by ASX company directors from 2005 to 2015 and found a "statistically significant" number of directors were making trade against the market after a share price moving announcement.
Director trades more common than you'd think
This means directors were buying their own company shares after the release of bad news, or selling shares follow good news.
It is alleged that these directors were profiteering from their intimate knowledge of the company and from information that isn't readily available to the market.
Director trades happen often and there have already been around 100 of such transactions in this month alone. Some notable trades have come from fund manager Magellan Financial Group Ltd (ASX: MFG), lottery and wagering group Tabcorp Holdings Limited (ASX: TAH) and fast food franchisor Domino's Pizza Enterprises Ltd. (ASX: DMP), just to name a few.
Do execs trade on inside information?
There are two key things to note from this research, in my view. The first is that our market regulator ASIC isn't worried about this because Dr Katselas definition of "insider trading" isn't the same as that used by ASIC.
Director trades following the release of market sensitive information doesn't in itself prove that these senior executives are using privileged information to turn a buck.
From my experience, any investor happy to take the time and trouble to intimately understand a company will have much the same advantage when making a call whether to buy or sell a stock following the release of market-sensitive news.
What I would be much more alarmed to see is when a director trades shares before the release of sensitive news.
Director trades can be good for shareholders
While I am not suggesting that company insiders don't exploit the edge they have over other investors, I think allowing directors to buy and sell shares benefits shareholders in general.
Following inside trades is often a rewarding exercise and some use this as one of the primary decision-making tools when making investments.
Also, I would be wary of investing in ASX companies where key management do not own a material number of shares in their own company.
Directors having a good chunk of capital in equity will ensure their interests are better aligned with those of ordinary shareholders.
