Sunday, September 21, 2014

Internal trading is a problem faced by firms of all sizes

By internal trading, I refer to the situations in which an employee or say a manager purchases a product from the market at price X, but "sells" it to his employer at price X+Y, where the differential Y can be considered as a sort of the employee's "trading margin". For example, an employee goes to the market to buy a stack of white A4 sheets for the printer. He buys it for, say, INR 150, and comes back and charges his employer INR 160, falsely quoting the price as INR 160. Since it is usually not possible to determine the actual market price of every little thing first-hand, and firms have to rely to a certain extent on "trust" on employees, this sort of "insider trading" is commonplace. Even a mandatory policy where bills must be produced for every purchase is not fully effective, since employees can easily ask the seller to produce a bill with price X+Y.