Why is insider trading repeatedly prohibited?

On February 10, 2023, the China Securities Regulatory Commission posted an article in the news section of the official website, notifying the handling of cases in 2022.

It mentioned: The bad market habit of “relying on inside information to make profits in stocks” has not yet been eradicated, and major events such as mergers and acquisitions, changes in actual controllers, etc. are still high-incidence areas for insider trading.

At the same time, because Chengfei Group wanted to go public through a backdoor, AVIC, which had just resumed trading, was going crazy, cutting eight 20cm one-word daily limits in a row, becoming the biggest bull stock in 2023.

Before everything is settled, we really can’t be too happy too early. It may be “scared” by this crazy trend, or it may be self-examination immediately after seeing the notification, AVIC suddenly announced:

“The possibility of insider trading is not ruled out.”

The malignant tumor of “insider trading” has been eroding the body of A shares, but there are still some people who regard it as the way to speculate in stocks.

【Strange transaction】

On February 13, AVIC issued an announcement. Although both parties to the transaction have adopted strict confidentiality measures during the planning and implementation of the transaction, the possibility that relevant institutions and individuals use inside information to conduct insider transactions cannot be ruled out. Therefore, this This transaction is at risk of being suspended, suspended or canceled due to suspected insider trading.

Judging from the stock price changes of AVIC, there was no major change before the stock was suspended on January 12.

However, judging from the publicly disclosed changes in shareholder shareholding data, it is indeed impossible to escape the suspicion of insider trading.

According to the data of the third quarter report, three natural persons, Guo Yanchao, Chen Chufang and Zhu Linying, Niu Sanxin, became the top ten tradable shareholders, holding 1.475 million shares, 1.3622 million shares and 1.30 million shares respectively.

On the trading day before the trading suspension, AVIC also updated the positions of the top 10 tradable shareholders.

Among them, Guo Yanchao increased his position by nearly 1.86 million shares, that is, from the end of September last year to January 11 this year, his holdings more than doubled, and his shareholding ratio increased to 0.56%, making him the seventh largest tradable shareholder.

It is not only Niusan who ambushed accurately, but also many investment institutions.

Two products of Guohua Life Insurance entered the top 10 tradable shareholders before the suspension of trading, and a fund product of China Merchants Bank, which entered the list of former major shareholders in the third quarterly report, increased its position by 810,000 shares in the latest shareholding data.

In addition, the special securities account for the repurchase of Avionics also appeared among the top 10 tradable shareholders before the suspension. Whether it is suspected of insider trading is also debatable.

Why is insider trading repeatedly prohibited?

▲The latest shareholder shareholding data of AVIC, source: Flush

Termination of mergers and acquisitions due to suspicion of insider trading is not without precedent in A shares.

On November 10, 2021, Sinic Finance announced that it planned to acquire no less than 51% of the shares of BAK Power and enter the then hot lithium-ion battery industry. Affected by this news, the company’s stock price has risen sharply, with an increase of more than 1.7 times from the end of October 2021 to the highest point on December 17.

However, more than ten days later, Sunny Finance received an inquiry letter requesting the company to explain whether there was any leakage of inside information in the M&A transaction. The company subsequently issued an announcement in response to market controversy, stating that the reorganization may be suspended, terminated or canceled due to suspected insider trading.

On March 31, 2022, Sony Finance announced the failure of the reorganization, and one of the important reasons for terminating the reorganization may be the suspicion of insider trading that is difficult to escape.

The reorganization failed, and the company’s stock price fell sharply, almost returning to the position before the announcement, and everything returned to the original point.

【The Fist of Supervision】

Insider trading is known as the “tumor” of the capital market. The information asymmetry caused by man-made damages the interests of small and medium-sized investors, and also disrupts the value discovery and resource allocation functions of the capital market. It can be called a shady mouse warehouse.

In recent years, under the background of the continuous advancement of the registration system reform, maintaining the three principles of information disclosure (openness, fairness, and justice) has become an important starting point for protecting the rights and interests of investors and purifying the market ecology.

At the same time, with the increasing informatization of the capital market, the transaction monitoring system of the Shanghai and Shenzhen Stock Exchanges has also become more and more advanced. Once the stock price or position structure of a listed company changes before major and undisclosed information is disclosed, it is easy for regulators to find clues from insiders of the listed company or the capital flow and communication of the transaction account.

In 2019, the CSRC punished only 55 insider trading cases. By 2022, the number of related cases has increased to 170, and the number of insider trading investigations has increased significantly.

In recent months, information about A-share insider trading has frequently appeared in the newspapers, and many cases are retrospective investigations. The objects and scope of punishment have been expanded, and the punishment has been strengthened, which shows the strict attitude of supervision.

On December 8, 2022, the lithium mining giant Ganfeng Lithium issued an announcement that the company’s securities account bought 26.4838 million yuan in the stock of the other company during the sensitive period of the merger and acquisition of Jiangte Electric in 2020, and the illegal income of 110.53 million yuan was confiscated by the China Securities Regulatory Commission. RMB 10,000, and a fine of RMB 3,315,900 was imposed. In this case, it is quite rare for a listed company to be punished for insider trading.

On February 11, 2023, Chunxing Precision announced that its actual controller, Sun Jiexiao, was prosecuted by the Suzhou Procuratorate for allegedly buying more than 200 million yuan of his own stock during the sensitive period of company mergers and acquisitions around 2016. This is one of the few cases in which the chairman of an A-share listed company was prosecuted by the procuratorate for alleged insider trading.

On February 12th, the game company Tom Cat, which has been on the rise recently due to multiple concepts such as ChatGPT, announced that the former chairman of the company had illegally reduced the stock of Jinke Culture during the acquisition of Tom Cat by Jinke Culture around 2019. , will face an administrative fine of 3 million yuan. Being fined for reducing holdings to avoid risks is also a rare typical case in recent years.

Don’t be lucky, don’t stretch out your hand, you will be caught if you stretch out your hand.

【Bad habits to be solved】

“Stock speculation based on inside information” has always been a bad habit in the A-share market. Many people think that the stock market is just a casino. To make money in stocks, they have to rely on insider information for short-term speculation.

In the era when speculation and hype prevailed in the past, value investing was not popular. Talking about important indicators such as macro cycles, industry trends, company quality, and valuations were often scoffed by investors. Instead, all kinds of gossip prevailed , All kinds of illegal transactions emerge in endlessly. If anyone can get important inside information and make a profit from stock trading, it is often considered a performance of ability.

In such a market ecology and atmosphere, insider trading has become a common phenomenon. For those who have the opportunity to obtain inside information, they are likely to make mistakes without knowing it, and even fall into the quagmire of illegal and criminal activities.

In 2017, Li Yinan, the founder of Niu Electric, was still working in GSR Venture Capital, and Huazhong CNC was planning for mergers and acquisitions. The then president Li Xiaotao and Li Yinan happened to be alumni. During the phone conversation with the other party, Li Yinan learned the relevant inside information, and then used the securities accounts of his brother-in-law and mother during the information-sensitive period to buy Huazhong CNC at a cost of 11.4855 million yuan, making a total profit of 7 million yuan.

In the end, things came to light. Li Yinan was imprisoned for insider trading and was sentenced to two years and six months in prison.

Objectively speaking, Li Yinan’s net worth has already exceeded 100 million yuan, and he has a good reputation. He should not have taken risks for a profit of 7 million yuan. The lamentable part of his experience lies in the influence of the market atmosphere on people.

If it is said that Li Yinan’s sinking may be due to negligence, many small and medium-sized retail investors are obsessed with inquiring inside information, which is a bit too stupid and naive. The so-called inside information that can be known to most people is either unreliable, or it has already been known to everyone, and the stock price expectations have already been filled, and they are only waiting for leeks to take over.

In fact, even if one really masters insider trading, it is not a guaranteed profit. Wang Jian, the former chairman of Tom Cat mentioned above, lost 2.3 million yuan in this transaction, lost his wife and lost his army.

From the investment logic of the capital market, any sudden inside information is actually full of uncertainties. Even if the benefits are realized afterwards and there is a short-term surge, it is a coincidence that can be encountered but not sought after.

If you really want to participate in this kind of themed investment with expected news such as restructuring, you can start from some fundamentals, such as the company’s market value, equity structure, asset securitization rate of major shareholders, and other directions. As long as you resist the urge to chase short-term wealth and participate in short-term games with a resigned attitude, it will be difficult to become a leek in the market, let alone fall into the quagmire of insider trading and other violations of laws and regulations.

Why is insider trading repeatedly prohibited?

In the long run, the real driving force that determines the stock price trend is still the two core indicators of valuation and performance. Any short-term huge fluctuations caused by sudden news will eventually be smoothed out by the market in the long river of time, and will eventually appear insignificant.

Especially in the era of the comprehensive registration system, the structure of investors has undergone tremendous changes, the concept of value investment is becoming popular, and the quality of a company is the most important factor in determining the trend of a company’s stock price. In the new market ecology, short-term strategies such as event-driven strategies are becoming more and more inappropriate, and “relying on inside information to speculate in stocks” is becoming more and more unreliable.