Although regulatory authorities are cracking down on insider trading, an increasing number of traders looking for easy money continue to resort to illicit transactions.
The Securities and Exchange Surveillance Commission is fighting back. It introduced a new online information-gathering system in late January named Compliance WAN (wide-area network), which gives regulators direct access to the history of customer transactions at brokerages.
Previously, the SESC had employees of securities houses personally deliver data stored on floppy disks whenever the watchdog organization suspected something fishy was going on in stock market and needed evidence.
SESC inspectors have praised the new online system, calling it user-friendly and saying it has improved efficiency at a remarkable level.
The network is also linked with domestic securities exchanges, and the SESC is cultivating close ties with the inspection units of brokerages and bourses.
Around 80 inspectors of the SESC’s Market Surveillance Division are tasked with spotting suspect dealings. A little less than half of them come from the five local outposts of the Finance Ministry that together cover all of Japan.
Insider trading occurs most frequently just before or after companies make important announcements concerning mergers and acquisitions, earnings results or forecasts, and stock splits.
At times like these, inspectors examine the timing of stock orders and the numbers of shares that changed hands to learn about the motives behind certain transactions.
Investor accounts at brokerages that appear repeatedly on the inspectors’ radar require particular attention, SESC officials said.
“Insider trading is like gambling,” a veteran inspector said. “Once you have done that and got away with it, it becomes an addiction.”
Suspect accounts are registered in the SESC database before the watchdog body moves on to get the names of the account holders and their trading histories.
In the fiscal year that ended last June, 951 trades came under investigation for possible insider trading. That was double from five years before. Since June, 464 cases caught the attention of the SESC by Jan. 31.
The inspectors refer their findings to the SESC’s Civil Penalties Investigation and Disclosure Documents Inspection Division or Investigation Division. The Investigation Division lodges a criminal complaint when deemed necessary.
Among celebrated cases of insider trading that came to light last year, SESC findings led to the dismissal of three workers at NHK and the arrest of a Nomura Securities Co. employee.
The NHK workers allegedly traded in shares using a news story that was about to be aired. The Nomura worker was accused of reaping profits by taking advantage of information only a brokerage would have been privy to.
On the other hand, countless suspicious trades end up as dead ends despite the inspectors’ indefatigable sleuth work. But when the targets of their investigations merit the attention of higher government offices or the judiciary, “Our sense of accomplishment tastes all the more sweeter,” an SESC staff member said.
Inspectors work in a meticulous and painstaking manner, always thinking about what the overall picture surrounding the deal should be and wondering when they would trade if they themselves were to perpetrate insider trading.
The online system is expected to shorten their current long hours.
“If we put together all the bits and pieces of information, one clear picture of wrongdoing comes into relief,” said Kenji Goto, an official with the SESC Market Surveillance Division. “Even a transaction involving a small amount of money won’t escape our attention.”
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