Market Manipulation and Insider Trading: The “Rotten Heart” of Finance

The Economist magazine termed the recent and ongoing scandals involving insider trading and market manipulation as reflecting the “rotten heart” of finance. These scandals have far-reaching economic and social consequences, and highlight the limits to national, industry and corporate oversight. A new approach is clearly needed. Historically, successful identification and prosecution of these illegal trading schemes has relied either on sophisticated market surveillance of trading behaviour, or the mandatory reporting by financial market participants and exchanges, of suspicious activity. Such oversight and surveillance, and a reliance on industry self-reporting, or whistle-blowing has had mixed success worldwide in part due to the ruthless profit-driven cultures present, and often encouraged, in many financial institutions.

This seminar will provide insights from recent prosecutions of both market manipulation (e.g. LIBOR and foreign exchange rate fixing), and insider trading with a focus on the role of individual decision-making. Current approaches require efficient markets and rational, consequence-based decision making by individuals. The recent evidence suggests that neither of these assumptions are necessarily true. Importantly, price arbitrage is not instantaneous and individual decisions often reflect behavioural bias. In such a complex financial, organisational and regulatory environment, top-down, external approaches to rule enforcement cannot ultimately succeed in preventing these crimes.

Jonathan A. Batten is Professor of Finance in the Department of Banking and Finance at Monash University, Australia. Prior to this position he was a Professor in Finance at the Hong Kong University of Science & Technology. He is the managing editor of Elsevier’s highly ranked Emerging Markets Review, and Journal of International Financial Markets Institutions & Money. He has published in those journals used by the Financial Times for ranking business schools (e.g. Journal of Business Ethics, Journal of Financial and Quantitative Analysis and the Journal of International Business Studies). In addition, he has also published work in applied mathematics (e.g. Chaos and Physica A), in environmental studies (Energy Economics and Resources Policy), and importantly in economic policy (e.g. World Bank Research Observer). He has worked with the Asian Development Bank and the World Bank on projects linked to regional economic development. He is the current President of the Eurasian Business and Economics Society (EBES) and a member of the Academic Council of the University of Economics, Ho Chi Minh City, Vietnam.