Updated Measurement of Market Cleanliness

Abstract

The study measures market cleanliness by looking at the extent to which share prices move ahead of the regulatory announcements that companies make to the market in the UK. The same methodology as OP23 has been used in the latest analysis but with some amendments made following feedback on last year's paper. First, the way in which informed price movements (IPM) are identified has been adjusted so that, for example, it takes better account of volatility in the share price. This reduces the risk that the research incorrectly identifies an IPM as having occurred during a period of increased volatility prior to a regulatory announcement. Equally, it reduces the risk of a failure to spot an IPM where volatility has reduced over time. Second, the research concludes that it is best to treat all takeover announcements as significant rather than just those which led to a very large price movement once the disclosure has been made, as all such announcements may be considered to be economically significant. Finally, it also extends the analysis to examine the behaviour of trading volumes ahead of announcements and how changes in the sample could affect the measure over time. The research covered two types of market announcements: regulatory disclosures about the trading performance of FTSE 350 companies in the periods 1998-2000; 2002/03; and 2004/05; and takeover announcements for listed companies made in 2000 and 2002-2005. In both types of announcement the study looks for abnormal price movements around the time of the disclosure which would indicate the possible availability of information that may be of use to an insider trader. It then looks for the cases where these 'significant announcements' were preceded by an apparent IPM that could suggest informed trading had occurred. The market cleanliness measure is the ratio of informed price movements to significant announcements. The results show that in 2004/05 there was a significant decrease in the level of possible informed trading ahead of FTSE 350 companies' trading announcements, with only 2% of significant announcements being preceded by informed price movements compared to 11.1% in the period 2002/03 and 19.6% in 1998-2000. The 2005 figures also include the six month period following the introduction of the new Disclosure Rules for listed companies under the Market Abuse Directive. For takeover announcements there was a decrease in the level of possible informed trading ahead of takeover announcements from 32.4% in 2004 to 23.7% in 2005. But the level still remains high and little changed from the situation in 2000 of 24% before the implementation of the Financial Services and Markets Act.