Costs of Trading and Market Efficiency †MyAssignmenthelp.com

Question: Discuss about the Costs of Trading and Market Efficiency. Answer: Introduction: When company employee shares confidential information about the company with unauthorized personnel, he/she puts the company at risk. Companies participating in the stock markets management are the most likely to be affected because some investors will have an unfair advantage(Doffou, 2010). The companies whose shares are sold in the stock exchanges have an obligation to openly disclose their financial statements at specified dates to the stock markets. The open declaration of the information provides a level playground for the investors. Confidentiality is a practice that helps embrace business related secrets which help create a common understanding and fostering self-belief among business partners(Perote Brio, 2011, p. 5). Violation of the privacy policy of any company means that possibly one is following the companys proceedings possibly to bring it down. When an employee discloses either the institutions client information or any confidential information to a third party, this is bound to affect the company negatively management. The third party, perhaps a competitor seeks any relevant information to overtake the target company. Employees are also fond of trending their employer's information to third parties for personal gains especially monetary favors. For instance, in the case study, Raj Rajaratnam emerged a popular and successful financial guru simply from insider trading. Rajaratnam succeeded in creating a well-anchored firm owing to his analytical skills and involvement in a series of illegal acts. At the first stages, insider trading does not seem risky especially for the individuals who think that they are intelligent enough to escape. Breaching confidential information whether one has signed a written confidentiality agreement or not can pose the employee, the employer and the clients to irreversible consequences(Thompson, 2013, p. 19). The most immediate course taken when an employee is found to have publicized information is termination. Some companies may decide to take legal measures against the individuals who violate their privacy. The company is likely to waste its resources, specifically money and time when a decision management to undergo lawsuit damages is made. In the case study about the Galleon group, they are bound to have incurred some costs in the court processes. Although refunds are effective to any costs and losses, possibly the employer would have made more profits if this had not happened. Clients, especially the frequent customers, keep track of the companies in the stock exchange markets. Continued instances of insider trading will definitely keep them off. Ineffective employers expose their company to the risk of losing its reputation at the markets(Nejat, 2010, p. 11). Ideally, if the company is unable to keep its secrets, no client will be ready to trust it. Soaring back to the initial position after a fall could take centuries or a lifetime. If by any chance, an employer doubts or has facts that any client has access to the companys secrets, the best appropriate measure is to terminate all the ongoing transactions. The employer found guilty of breaching the information should then be made to undergo dire legal measures. In my opinion, the knowledge of any controversy affecting the firms confidentiality would definitely affect the decisions of trading the stocks. Perhaps, I would reconsider the markets before trading the stocks. Taking thorough investigations may help the company identify some facts not captured in the earlier reports. References Doffou, A., 2010. Insider Trading: A Review of Theory and Empirical Work. [Online] Available at: https://www.researchgate.net/publication/228321500_Insider_Trading_A_Review_of_Theory_and_Empirical_Work [Accessed 26 September 2017]. Nejat, 2010. Insiders' profits, costs of trading, and market efficiency. Journal of Financial Economics, 16(2), pp. 8-13. Perote, J. Brio, E. D., 2011. What Enhances Insider Trading Profitability?, Salamanca: International Atlantic Economic Society management. Thompson, J. H., 2013. A Global Comparison of Insider Trading Regulations. International Journal of Accounting and Financial Reporting, 3(1), pp. 1-23.