It happens all the time
Posted: October 27th, 2009 | Author: Wayne Weddington | Filed under: Opinion | Tags: crime, insider trading, SEC, short selling, Trading |
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The Street is abuzz about the arrest of Raj Rajaratnam of Galleon Group for insider trading. Turns out the talented, prescient trader has allegedly gotten a helping hand from a host of insiders, McKinsey & Co. included (again, allegedly). Ol’ Raj is accused of taking sensitive information which proved to be quite profitable when known in advance of everyone else in the game.
But sensitive information gets whispered into privileged ears all the time. It is the very lubricant of the Street. It is common. The trick is to be on the receiving end. (Note: I continue to use the term, capital ‘S’ the “Street,” despite that for all intents of purpose, it no longer exists).
On the old trading floors of the exchanges, traders would routinely front-run large stock orders for a tidy risk-free profit. Exchanges today are electronic so it is harder to cheat the old-school way. Now there is “flash trading” and “dark pools”. Flash trading allows certain customers to see incoming buy/sell orders earlier than the general market, for a fee. Dark pools alert certain traders about stock availability and pricing prior to the general public, making it easier to trade large blocks at better prices. It boils down to a stacked deck — you are either inside information or outside. More profitable, less profitable.
It is the same on the banking side. Often, very often, the stock prices of acquisition targets move aggressively prior to the announcements, or similarly to earnings announcements in the 24 hours prior. Obviously somebody knew something otherwise the shares would not move in the “right” direction early.
It is not nice to consider, but it would not surprise me if the criminals who perpetrated 9/11 took short market positions in the days prior, reaping a huge profit by knowing information in advance. I use this example to illustrate just how stark and ugly the practice is. Perfect information has its benefits. Seeking its own insider trading edge, it was sheer brilliance that the Pentagon’s experimental Catastrophe Futures market was set up to to predict future calamities….. but the political reaction was not so kind.
It would be impossible to stop insider trading because, put bluntly, Wall Street is the practice of trading on superior information, and inside information is the most superior of all. The SEC cannot stop insider trading but it can and should stop the most egregious perpetrators.