The theory behind a market is that prices are set by participants based on all available information. The market becomes distorted and loses its legitimacy when access to information is unevenly distributed. That is why stock exchanges have rules for the disclosure of market-sensitive information, par example.
Another component is that market supervisors manages to get hold of those who use such information before it is made public. Those so-called insiders are namely committing a crime if they act on information not yet public.
Last year, 96 suspected offences of that kind were reported to Swedish authorities. But, the Swedish Economic Crime Authority were not able to institute one single prosecution. The year before, 111 insider trading offences were reported, but also then the authority could not find sufficient evidence in order to initiate any prosecution of offenders.
This makes it official: it is fairly safe for insiders in Sweden to trade on non-public but market sensitive information.
Shareholders on the Stockholm Stock Exchange can thus be divided into two types: those with, and those without insider information. The losers will surely be the small investors and retirement savers.
One example from last month is how one of the Swedish public pension funds sold shares in the media group Metro. A few days later, the stock gained 20 per cent in value in just a few hours, before the trade eventually was halted due to the suspicious trading pattern. The next trading day it was announced that the investment company Kinnevik placed a take-over bid on the company. Someone made a fortune, while Swedish pensioners sure were left out.
A government inquiry comparing Sweden's insider trading to several other countries - including Britain, Finland, Germany and the US, has shown that, in relation to the stock market's size, there are more cases of insider trading reported in Sweden than in any of the other countries.
Swedes may be better at notifying the police, but a more frightening explanation is that more insider trading is committed in Sweden than elsewhere.
In addition, there seems to be a large figure of unrecorded cases. Audit Firm PWC has conducted a study of the Stockholm Stock Exchange that showed startling results. Sharp price movements could be observed at 30 per cent of the occasions before a major business deal concerning a listed company was announced to the public.
At the same time there are gaps in the law, or should we say ravines.
If an insider is to resign, the person is allowed to sell shares before the market is informed. A CEO can thus for example short shares prior to his or her departure, and a possible negative price reaction occurs. The explanation is that current Swedish law requires the person to have received the insider information, not generated it themself.
Another major weakness is that people who own shares through so-called endowment insurances (kapitalförsäkringar) are in the clear. This since the shares are held indirectly via an insurance agency. There is today surprisingly no requirement for those with access to insider information, holding their equity in endowment insurances, to report their personal trading to the registry of the Swedish Financial Supervisory Authority.
An insane arrangement really. A change is on its way even if it is taking the government an incredibly long time to act.
The Economic Crime Authority has promised to streamline its operations and to enhance cooperation with other agencies. Moreover, they promise "tougher methods", which means to arrest the suspects in their workplaces. Perhaps they hope that the risk of having to be ashamed in front of colleagues will have a preventive effect.
Either way, it is clear that much more needs to be done in order to restore confidence. Otherwise, the Swedish politicians must forget the opportunity to launch Stockholm as an important hub for international finance.