A day before the collapse of Uchumi chain of super markets in Kenya in 2006, a well known net worth investor disposed of a huge chunk of the firm’s shares. The next day, the firm was declared bankrupt and was suspended from trading in the Nairobi Stock Exchange (NSE). Allegations of insider trading in the NSE were simply brushed off. To date, nobody has been charged. This is not an isolated case; abnormal stock price changes have been a common phenomena in the NSE, with CFC bank, East African Cable Ltd and Equity bank being some of the most recent victims.

According to About.com, Insider trading occurs when someone makes an investment decision based on information that is not available to the general public. In most cases, the information either allows them to profit, or avoids losses. The latter was quite evident in the case of Uchumi supermarket.

The Kenyan finance Minister, Hon. Amos Kimunya mentioned that the Capital Market Authority (CMA) Act will be amended to give the Authority power to levy financial penalties on unscrupulous market players depending on the nature and magnitude of the offence, in his recent budget speech. But until then insider trading still remains uncurbed in the NSE. 

This is the situation in most stocks market around Africa. Due to the nascent nature of most bourses in Africa, governments have not yet set up proper measures to ensure that vices such as insider trading are curbed. Unscrupulous investors are exploiting this loophole and gaining an edge over other investors. 

Insider trading gives an undue edge to big individual and institutional investors over small individual investors who lack access to confidential company information from the insiders. Such information may, in some extreme cases, cost the acquirer and retail traders may not be able, in most cases, to bear this cost. 

The inefficiencies of emerging stock markets make it even difficult for the CMA to act as a watchdog against insider trading. However, the greatest weakness of the Authority appears to be in its lack of effective policing rather than its ability to impose penalties on offenders. In most offenses they act after the mischief has been done, like in the case of the recently collapsed stock brokerage firm Francis Thuo. In others they simply don’t take action at all.

According to Michael Musau, an Investment Manager in Nairobi, insider trading does not take place unless the individual concerned is in a fiduciary position to disclose the vital information to the general public. In his view, many of the cases regarded as insider trading in the NSE are not so until someone takes it up to court. The CMA, at this stage, is not capable of fighting this vice in the market since it does not have the mandate to do so.

Many cases of insider involvement have gone unmentioned. It is time we put an end to this menace that sidelines many small investors. The responsibility of taking action against inside trading offenders does not only rest with the CMA but also the investors. Any investor, with knowledge of other investors who are using insider trading to gain over others has a moral duty to report this to the authorities. In fact, keeping quiet over it will be an obstruction to justice and can land you in jail. 

However, investors need to understand exactly what consist of insider trading and what is not. There is a very thin line between insider trading and legal information. An insider is a company’s director, official or anyone with a stake of 10 percent or more in the company. These individuals usually have knowledge of the company’s dealings and can trade their stakes on this information. This will only be considered insider trading if the insider does not disclose the reason of his trade within two days of doing so. But if he does that is considered legal insider trading.

Insider trading is still a very new concept in most emerging markets. Even developed markets like the London Stock Exchange are still grappling with it and are yet to fully understand the extend to which it’s admissible or not. For small bourses such as our NSE, we need to totally shun it to ensure that investors can enjoy the enhanced liquidity that comes with insider trading free markets.