Measuring Market Cleanliness

The paper presents a statistical method for measuring the level of informed trading in the UK ahead of regulatory announcements (takeover announcements and trading updates). The measure is based on the use of event studies to identify significant abnormal stock returns ahead of regulatory announcements. The paper assesses whether the measure improved following the implementation of the Financial Services and Markets Act (2000) which introduced a civil regime for market abuse which should, in theory, have made insider trading easier to prosecute. The paper does not find an improvement in the frequency of informed trading and suggests this may be due to the absence of significant enforcement against insider trading in the period under investigation