Wednesday, March 9, 2011

Comparing Corporate Disclosure and Insider Trading in the US and UK

Global investing can appear to be easier than it is in practice. In particular, there are significant differences in regulatory regimes and the levels of public disclosure of corporate news flow. In particular, when comparing the UK to the US there are significant differences which can catch out the private investor. Not only do these differences manifest themselves in the legitimate trading but also for insider trading as well!
Investors need to consider these aspects, not because insider trading is advocated, but because it is never a good idea to trade against someone with better information as you. The key differences between the UK and US are that American companies report quarterly whilst British companies report every six months with management statements in the interim. Moreover, US companies give far more information. Investors can access webcasts and transcripts of earnings presentations and analyst Q & A sessions. UK companies do not give anything like this level of disclosure because the Financial Services Authority (the regulatory body in the UK) does not allow it. Ostensibly, this is to ‘protect’ private investors.
Unfortunately, this ridiculous state of affairs means that institutional investors are often privy to timely and significant market sensitive information that British private investors cannot access in the same fashion. Retail investors in UK companies cannot even access analyst Q & A sessions, and if the answers are not supposed to disclose key information on the company’s prospects than what are the questions being asked for?
The issue arose recently in connection with Pace and the company’s results statement. The management gave no mention whatsoever of the failure of a major client to make an order, yet then separately disclosed this information to a selected group of analysts. Consequently, Pace are believed to be facing a possible FSA inquiry into these actions.
The sad thing is that the Pace example is not isolated. It just happens to be a highly visible case. There is no excuse for private investors being excluded from corporate announcements, in which material information is disclosed. Whilst this situation is wonderful for institutional investors, it creates an uneven playing field and gives the City of London a reputation for being riddled with insiders acting secluded from private viewing.
One remarkable aspect, of this difference between the UK and the US is that the volatility over results seems to be less with British companies. I suspect this is because UK financial institutions tend to garner enough information about a company’s prospects beforehand. Whilst, in the US the greater requirements for transparent public disclosure mean that information is with held until fully public disclosure.
Unfortunately, the latter aspect has created a cottage industry of companies in the US who specialise in ‘channel checks’ and ‘networking’ with investors and corporate executives. Much of the activity of these companies seems to be devoted to garnering information prior to earnings results. Indeed, the Rajaratnam case has provided a telling insight into how some of the shadier aspects of this activity take place.
You pay’s your money, you takes your choice.
With the UK, you will get less volatility over results but less access to important information. With the US you will the reverse.  The US way is better, but it is best to be cautious with trading over results.

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