Insider Trading, Market Efficiency and Journalism: A Discussion of the CJEU’s Daily Mail Case

The Court of Justice of the European Union (CJEU) recently handed down a long-awaited decision (Case C - 302/20 M. A contre Autorité des marchés financiers [2022] OJ) about a financial journalist from the Daily Mail condemned by the French Market Authority (AMF), and thereafter the Paris Court of Appeal, for unlawfully disclosing the forthcoming publication of newspaper articles reporting rumours of takeover bids targeting French companies. In response to a preliminary reference from the Court of Appeal, the CJEU analysed that disclosure of inside information by journalists is lawful to the extent necessary to protect the freedom of the press. A journalist may, for instance, disclose the content of their article to check the accuracy of the information contained therein, but may not do so just for the sake of informing a third party about the article’s forthcoming publication.

Although in line with European law, the CJEU’s decision creates substantial uncertainty as to the application of insider trading rules to journalists, thereby indirectly hindering the purpose of these rules: protecting market efficiency.

Insider Trading and Market Efficiency

Both the former Market Abuse Directive (MAD) of 2003 (applicable at the time of the facts) and those of the Market Abuse Regulation (MAR) of 2014 (some of whose provisions were retroactively applied as more lenient than those of MAD) define inside information as ‘information of a precise nature, which has not been made public, relating, directly or indirectly, to one or more issuers or to one or more financial instruments, and which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments’. Trading upon inside information as well as some forms of inside information disclosure are unlawful under European law and can expose their authors to significant criminal and administrative sanctions.

MAD’s and MAR’s recitals make it clear that the purpose of these rules is to promote equality between investors and investor confidence, with the aim of fostering the smooth functioning of financial markets, economic growth and job creation within the European Union. The European insider trading regime is thus concerned with maximising capital flows to European financial markets, in the hope that these markets contribute to the financing of European companies and, ultimately, European citizens’ welfare.

Schematically, investors are encouraged to invest in financial markets when (i) asset prices reflect listed companies’ fundamental value (informational efficiency) and (ii) the cost of doing so is minimised (liquidity).

Informational efficiency is enhanced when traders have positive or negative information about companies leading them, respectively, to buy or sell shares in these companies. The more information there is about a given company, the more investors are able to take savvy investment decisions, and the more their trades push prices toward issuers’ fundamental value. When information is public, meaning that all investors can access and trade upon it, informational efficiency is maximised: a vast number of investors are able to interpret it in various ways, and the market at large becomes a powerful machine of quickly and accurately incorporating information into asset prices through investors’ respective trades. When information is private, meaning that only a handful of investors are aware of it, their informed trading’s contribution to price accuracy is more limited, for at least two reasons: (i) these few investors are more likely to incorrectly interpret a given piece of information than the market at large and (ii) privately informed investors may seek to engage in trading strategies seeking to minimise the price impact of their trades so as to maximise the benefits drawn from their private information.

Liquidity, on its end, is inversely correlated with the quantity of privately informed trading (often simply referred to as ‘informed trading’): the more informed trading can be expected to happen on the market, the less uninformed traders will be encouraged to trade, for fear of losing money against better-informed counterparts, and the less likely they will be to invest in financial markets. To shield themselves against this risk, uninformed traders will only accept to sell a given security at a higher price than that at which they are ready to buy it, and vice-versa. The difference between available buy and sell prices, called the ‘bid-ask spread’, will be larger the higher the anticipation, by uninformed traders, that they will trade with informed traders. The question, then, is whether informational efficiency gains resulting from informed trading are sufficiently large to offset informed trading’s liquidity cost or, in other words, whether informed trading fosters market efficiency. There is a good case for prohibiting informed trading whenever the answer to this question is negative.

This is where insider trading rules come into play. From a market efficiency perspective, these rules should only prohibit those forms of informed trading having a higher negative impact on liquidity than positive impact on informational efficiency. Likewise, disclosure of inside information should only be forbidden in cases where such disclosure has a higher liquidity cost than its informational efficiency benefits.

An archetypical example of informed trading that is detrimental to market efficiency is that of a manager trading in their company’s shares or sharing the company’s financial results with a relative right before the disclosure of the company’s financial statements. The manager’s or their relative’s trades will have almost no impact on informational efficiency, as financial statements will be disclosed immediately thereafter. At the same time, uninformed traders’ expectation that managers are able to engage in this sort of trading may lead them to considerably increase the bid-ask spread, for fear of trading with much better-informed counterparts.

An opposite example would be that of an activist short seller uncovering fraudulent activities and accounting malpractices committed by a listed issuer’s management and making a profit by shorting the company and subsequently publishing their report about the management's misconduct. In this context, of which the Wirecard case is a caricatural illustration, the disclosure of the short seller’s report may correct an extreme mispricing of the issuer’s shares, thereby making a substantial contribution to informational efficiency that clearly justifies the trade’s liquidity cost. This case is different from the previous one is that activist short sellers only perform research and publish reports about companies because they are able to profit from it by trading upon their publication, contrary to listed companies’ managers who have a legal obligation to regularly publish financial statements.

Between these two extremes, however, some instances of informed trading or disclosure of information may be less intuitive and more difficult to settle. Information disclosure by journalists is one of these.

Journalism and Insider Trading

Let us now get back to the Daily Mail case. Insider trading upon the forthcoming publication of a newspaper article, either by the journalist or by a third party to whom inside information has been disclosed, may, to some extent, harm market efficiency. First, uninformed traders’ expectation of informed trading lowers liquidity. Second, the information indirectly conveyed to the market by the journalist’s trades (which push the share price up or down depending on whether the journalist buys or sells shares) will be revealed to the market very soon anyway through the publication of the article, so that the informational efficiency benefits of the journalist’s informed trades will be limited at best.

Another important factor to take into consideration, however, is that journalists’ excessive exposure to the risk of sanction may deter them from properly carrying out their investigative work. In particular, journalists may seek to limit their interactions with their sources for fear of giving them too much information and being sanctioned as a result, despite these interactions being potentially fruitful for information discovery and, ultimately, information disclosure through newspaper articles. As a result, journalists’ contribution to informational efficiency through the publication of articles may be discouraged, thereby harming market efficiency indirectly. Consequently, a compromise ought to be reached between potential direct harms to market efficiency caused by laxist insider trading rules and indirect harms thereto when these rules overdeter journalists from performing their mission.

According to the CJEU, a balance needs to be struck between freedom of press and market integrity (a rather obscure term that may be assimilated to market efficiency in the context of insider trading) [84]: on the one hand, both the publication of articles and the related preparatory work are essential components of the freedom of press [68] and shouldn’t be excessively dissuaded by market abuse rules [85]. On the other hand, disclosure of inside information may have a negative impact on investor confidence (which as we saw earlier depends on market efficiency) [87]. This is why journalists should, as part of their investigations, be able to disclose information to third parties [82] but not ‘beyond what [is] necessary in order to verify the information contained in [the] article’ [83].

At first glance, the CJEU’s decision perfectly addresses the need for encouraging journalists to publish information while discouraging them from disclosing it in circumstances where the liquidity cost of allowing information disclosure isn’t justified by the informational efficiency gains associated with the publication of articles. The devil, however, is in the details. Conceptually, the CJEU overlooks the fact that freedom of press contributes to market efficiency by encouraging the publication of information about listed companies. Instead of acknowledging the alignment of both objectives, the Court presents them as somewhat antagonistic and conflicting with each other. Furthermore, requiring journalists to disclose information only to the extent ‘necessary’ to the protection of freedom of press appears too restrictive, in that it exposes journalists to substantial uncertainty: when should disclosure of information be considered as necessary? Should it be considered as such if the journalist’s source refuses to reveal information without knowing the date of publication and content of the article? What about the case where the journalist works with a source on an ongoing basis and needs to show their trust in them by keeping them informed about the content and date of publication of their articles? And what if the journalist unintentionally reveals more information than necessary?

This uncertainty comes on top of the considerable sanctions to which unlawful disclosure of inside information exposes its authors (in France, up to 100 million euros). Exposing journalists to prosecution in these circumstances may considerably hinder their incentives to effectively collect and exploit information, to the detriment of the very objectives pursued by insider trading rules. This decision is also problematic for other market participants, such as activist investors, who may significantly contribute to informational efficiency by acquiring and disclosing inside information and aren’t even protected by article 21 of MAR, which requires market authorities to take freedom of press into account when enforcing insider trading rules. Finally, journalists’ essential role in the functioning of democratic societies and other virtuous effects of their activity (such as their potential disciplining effect on companies’ managers) make it all the more important to protect them against overdeterrence.

Forbidding journalists’ disclosure of information only when happening outside the normal course of their profession, rather than whenever it isn’t necessary for the exercise of their mission, would be more than sufficient to protect the objectives pursued by insider trading rules without discouraging journalists from carrying out their professional activity. The burden put by the CJEU’s decision on journalists appears all the more excessive that insider trading rules remain fully applicable to persons trading upon information disclosed by journalists, thereby dissuading them from engaging in insider trading whether or not disclosure of information by the journalist was lawful.

Paul Oudin is a DPhil in Law Student at the University of Oxford, an Associate at Vermeille & Co and a Member of the Rules for Growth Institute.