Insider trading has been rife on Wall Street, academics conclude

["Dave Farber" <farber () gmail com>]

Begin forwarded message:

> From: Dewayne Hendricks <dewayne () warpspeed com>
> Date: February 13, 2018 at 7:03:49 AM EST
> To: Multiple recipients of Dewayne-Net <dewayne-net () warpspeed com>
> Subject: [Dewayne-Net] Insider trading has been rife on Wall Street, academics conclude
> Reply-To: dewayne-net () warpspeed com
>
> [Note:  This item comes from friend Steve Schear.  DLH]
>
> Insider trading has been rife on Wall Street, academics conclude
> One study suggests insiders profited even from the global financial crisis; another that the whole share-trading 
> system is rigged
> Feb 10 2018
> <https://www.economist.com/news/finance-and-economics/21736561-one-study-suggests-insiders-profited-even-global-financial-crisis-another>
>
> INSIDER-TRADING prosecutions have netted plenty of small fry. But many grumble that the big fish swim off unharmed. 
> That nagging fear has some new academic backing, from three studies. One argues that well-connected insiders profited 
> even from the financial crisis.* The others go further still, suggesting the entire share-trading system is rigged.**
>
> What is known about insider trading tends to come from prosecutions. But these require fortuitous tip-offs and 
> extensive, expensive investigations, involving the examination of complex evidence from phone calls, e-mails or 
> informants wired with recorders. The resulting haze of numbers may befuddle a jury unless they are leavened with a 
> few spicy details—exotic code words, say, or (even better) suitcases filled with cash.
>
> The papers make imaginative use of pattern analysis from data to find that insider trading is probably pervasive. The 
> approach reflects a new way of analysing conduct in the financial markets. It also raises questions about how to 
> treat behaviour if it is systemic rather than limited to the occasional rogue trader.
>
> The first paper starts from the private meetings American government officials held during the crisis with financial 
> institutions. Not made public at the time were critical details about what came to be called the Troubled Asset 
> Relief Programme (TARP), notably how much money would be involved and how it would be allocated. This mattered 
> hugely. The very survival of some institutions was at stake; in the end, hundreds of billions of dollars were 
> pledged. Knowing the structure and scope of the bail-out in advance would have been a vitally important piece of 
> information for investors during this period.
>
> The paper examines conduct at 497 financial institutions between 2005 and 2011, paying particular attention to 
> individuals who had previously worked in the federal government, in institutions including the Federal Reserve. In 
> the two years prior to the TARP, these people’s trading gave no evidence of unusual insight. But in the nine months 
> after the TARP was announced, they achieved particularly good results. The paper concludes that “politically 
> connected insiders had a significant information advantage during the crisis and traded to exploit this advantage.”
>
> The other papers use data from 1999 to 2014 from Abel Noser, a firm used by institutional investors to track trading 
> transaction costs. The data covered 300 brokers but the papers focus on the 30 biggest, through which 80-85% of the 
> trading volume flowed. They find evidence that large investors tend to trade more in periods ahead of important 
> announcements, say, which is hard to explain unless they have access to unusually good information.
>
> They could acquire such information in several ways. The most innocent is that brokers “spread the news” of a 
> particular client’s desire to buy or sell large amounts of shares in order to create a market, much as an auction 
> house might do for a painting. But it is also possible, the papers suggest, that they give this information to 
> favoured clients to boost their own business. Strengthening this argument is the finding that large asset managers 
> which use their own affiliated brokers do not lose out.
>
> [snip]
>
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