My paper, Insider Trading via the Corporation, recently posted on SSRN, critically examines the regulations applicable to U.S. firms trading in their own shares and puts forward a proposal for reform.
Publicly-traded U.S. firms buy and sell a staggering amount of their own shares in the open market each year. Open-market repurchases (“OMRs”) alone total hundreds of billions of dollars per year; in 2007, they reached $1 trillion. Firms are also increasingly selling shares in the open market through so-called “at-the-market” issuances (“ATMs”).
When a U.S. firm trades in its own shares, its trade-disclosure requirements are minimal. The firm must report only aggregate trading activity, and not until well into the following quarter. Thus, the firm can secretly buy and sell its own shares in the open market for several months, and never disclose the exact details of its trades to shareholders and regulators. The lack of detailed disclosure, I explain, makes it difficult to detect illegal trading on material inside information; the lack of timely disclosure makes it difficult for investors to determine when the firm is trading on valuable but sub-material information.
