
Insider trading has been rife on Wall Street, academics conclude - Bitcoin_McPonzi
https://www.economist.com/news/finance-and-economics/21736561-one-study-suggests-insiders-profited-even-global-financial-crisis-another?frsc=dg%7Ce
======
geoffc
For the last 30 years I have bought stock in tech products I use and like and
hold it until I no longer like the product. This simple strategy has
dramatically outperformed the indexes. In hindsight the last 30 years have
been great for tech so maybe I just got lucky on my industry selection.

~~~
PricelessValue
> In hindsight the last 30 years have been great for tech so maybe I just got
> lucky on my industry selection.

A lot of tech companies went bankrupt. So you got "lucky" selecting the right
tech companies and buying and selling them at the right time.

If you bought YHOO or Petsdotcom or any of AOL during the dot com boom and
held on, then you would have lost a lot of money. For every AMZN there are
dozens of tech companies that went under.

Also, the last 30 years have seen an absurd stock market boom. Take a look at
the chart to see what the last 30 years have been like. The S&P has been on a
tear.

[https://en.wikipedia.org/wiki/S%26P_500_Index#/media/File:S_...](https://en.wikipedia.org/wiki/S%26P_500_Index#/media/File:S_and_P_500_chart_1950_to_2016_with_averages.png)

To the moon baby!

~~~
geoffc
Companies with great products rarely go bankrupt in my experience (while the
product is great of course).

~~~
bfuller
AOL never went bankrupt.

~~~
acct1771
On the contrary, it's a significant part of a very alive ad network.

------
PricelessValue
Why do we need academics to tell us? Go ask wall street. Go work on wall
street. It's not a secret. There is a reason why the most valuable commodity
on wall street is information.

We know insider trading happens. Just like we know price collusion ( libor
rates or lysine price fixing ) happens.

If banks are colluding on something as fundamentally important as libor rates,
then everything and anything is happening.

~~~
mruniverse
I think the issue is that they can show that it's happening with data. And
only after that, can solutions be suggested.

And the solutions would be systematic ones (changing trading laws).

------
tankenmate
And the people who can consistently do insider trading are also the people who
can use parallel construction to justify their trading decisions. For every
possible trade there are advisers out there for both sides of the trade, if
you already know which side is going to win all you have to do is listen to
your own choice of advisers beforehand. "Yes your Honour, I talked to Fred
from Conveniently Biased Advisers LLC three days before the event. He assured
me that this trade would benefit me, so I made the trade."

~~~
kerkeslager
Can you point to an example of parallel construction being (successfully) used
as a defense in an insider trading case? If the prosecution can prove that you
had insider knowledge, it seems like the availability of non-insider knowledge
isn't relevant because literally everyone has access to non-insider knowledge
(that's the definition of what makes insider knowledge--that not everyone has
access to it).

I've heard of parallel construction being used to prosecute in criminal cases
with illegally-collected evidence, but never as a defense. That said, I'm not
a lawyer and I don't follow case law in that much detail, so I wouldn't be
surprised at all if this has happened.

~~~
refurb
I would guess the ones who are smart enough to "parallel construct" are the
ones that don't get caught?

The SEC looks at trading history when investigating insider trading. Never
bought stock X, but 3 days before a merger you bought a ton of out-of-the-
money call options? You bet the SEC will be talking to you.

Have a history of investing in a sector and make a not-out-of-the-ordinary
large purchase of stock 3 days before the merger? The SEC might just choose to
go after the bigger fish.

------
anigbrowl
I'm perplexed that virtually all the comments are accepting of this state of
affairs and focused on retail investment strategies, and so little given to
the implications of how the public will respond to this information..

~~~
ironic_ali
The public won't respond at all in any meaningful sense to the perpetrators.
There will be some grumbling about how terrible it is and then it will be
forgotten.

HSBC laundered money for child trafficers and drug cartels, then the British
government stepped in, gave a pathetic fine compared to the profits they made
and nothing else happened. No one went to jail and the politicians that saved
HSBC "in the interests of global sfinancial stability", got voted back in.
It's sickening to the few, but the majority will always vote for the status
quo. The rest may grumble at the MSM headline (never repeated after 2 days),
but will do nothing.

TPTB treat "the plebs" like cattle to be milked and it keeps working for them,
so why change.

~~~
anigbrowl
I agree in large part, but as evidence of corruption mounts so does public
dissatisfaction. Outrage is temporary but dissatisfaction is cumulative and
can, I believe, be channeled.

------
brownbat
Before getting outraged I try to apply the Matt Levine test: insider trading
is about theft, not fairness.

The first study talks about investments during TARP. The premise of TARP was
that credit markets were seized by irrational fears, and government
investments could reestablish normalcy.

It doesn't say what strategy those with government connections used, but...

I wonder if we should be angry at people who defied the trend and were
rational even before the government did anything. Maybe we want things like
TARP to work, but not too well or too early. Certainly not with the help of
anyone willing to accept the risk that the policy process might swerve at the
last minute.

The article then begrudgingly admits a benign explanation for the second
study. Brokers looking for buyers or sellers naturally leak information. It
turns out it's hard to try to sell something when you never ask anyone if they
are willing to buy it. On the other end of the line, people who suddenly get
offers to buy or sell a thing might change their mind about its value.

That's not so much insider trading as it is how all markets work.

Here's some more, from a far better writer than me:
[https://www.bloomberg.com/view/articles/2015-04-01/another-p...](https://www.bloomberg.com/view/articles/2015-04-01/another-
politician-wants-to-ban-insider-trading)

[https://www.bloomberg.com/view/articles/2018-01-03/bill-
ackm...](https://www.bloomberg.com/view/articles/2018-01-03/bill-ackman-s-
allergan-insider-trading-dispute-doesn-t-look-bad)

He also writes about Bitcoin if you're into that.

------
RcouF1uZ4gsC
Being a retail customer on Wall Street is a fool's game. The large finds have
access to legal data and insights that you don't have. Just invest in an index
fund or large mutual fund.

~~~
adamnemecek
I wouldn't be so diffident. In my experience, Wall Street for example doesn't
understand tech that much. E.g. exactly a year ago, Nvidia had a three month
dip. After I listened on the earnings call, all the WS people were asking "why
are people still buying gpus and why is it accelerating". They didn't know
about ml, gaming and crypto.

Wall Street is too oriented on the next 3 months, not the next year.

~~~
tlogan
I think Wall Street is only place where laymen are convinced they know more
than professionals. You will not see that in medical profession.

But, on the other hand, trading professionals need retail investors to think
that they know better then professionals.

~~~
ljf
Have you not heard of the antivax conspiracy people? People often think they
know better that others.

That said I knew of a person working as a trader who was one a team of 20
young guys taken on fresh from uni - at the end of the year the company sacked
the 18 guys who lost money and told all their clients about the 2 whizz kids
who had just had an amazing year. If the professionals all knew so much I'm
not sure why those 18 people would have failed to turn a profit.

~~~
pbhjpbhj
That's awesome: I wonder how far you'd get by starting a trading team of 1000
(shell companies!?), trading for 5 years and then marketing "our trading group
of 5 have made an inflation-busting, above market average profit for the last
5 years!". Would people throw money at you?

~~~
tjalfi
You have described mutual funds. See the Mutual Funds section of [0].

[0]
[http://philip.greenspun.com/materialism/money](http://philip.greenspun.com/materialism/money)

------
montrose
I love the technique of catching misdeeds via subtle statistical traces that
the bad guys leave. It is extremely hard not to leave a statistical signature
when you do something bad repeatedly. You leave tracks you have no idea you're
leaving. And since it does seem likely that there's a lot of de facto insider
trading, I expect there will be more studies of the type described in this
article.

------
hendzen
"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."

Typically for regular macro-level financial announcements like GDP growth,
employment numbers/non-farm payrolls, rates announcements, etc, the
announcements happen on well-defined, publicly known intervals. Similarly for
company specific things like earnings announcements. It is expected that there
will be lots of (non-insider) trading before these announcements - active
investors may just want to reduce risk before a large move in an unknown
direction. Of course, I don't doubt that there is a large amount of insider
trading, but its worth considering other causes of an observed phenomenon
rather than just jumping to conclusions.

~~~
jnordwick
I traded those news releases and earnings announcements for almost 10 years.
There is no information leak on the news side. The market becomes completely
silent leading into the second before the release (some countries do have
issues though, but relatively small). Earnings announcements are a little
different but still not a problem.

A scene like Trading Places FCOJ isn't happening.

------
jnordwick
The only show correlation under an overly simplified model and show odd signs
of data massage or p-hacking.

For example the TARP paper shows that those with government connections
performed better, but only after 9 months, and we dont know if that was a blip
that then reverts back. I've only scanned the paper.

Why after 9 months? The usual mechanism of front running the info you would
expect the largest difference to be immediate and normalize from there. That
is a warning sign for me that these papers aren't very rigorous or their model
is too simplistic.

The other paper talks of information leakage on large order flow, but that is
supposed to happen. When a broker has to transact a large order and he shops
it, it would be silly to not expect leakage. The counterparty he goes to now
knows about a big order and it will change his perception of things regardless
of how many laws you make.

With the era of even better algos to sniff out intent, some of this leakage
could be from just better data mining tools.

Do people expect 100% hidden info to all of the sudden go live and tank a
price when a huge trade is printed? Leakage is often wanted to give the market
time to adjust.

~~~
jnordwick
-1 really? This isn't the greatest comment in the world but negative? HN and any financial/economic topics don't mix well at all.

Edit: Do people really consider this comment worse than almost every other
top-level comment? It currently stands second to last, the last being bitcoin
spam. Maybe my view of comment quality is off?

(This edit is taking the suggestion from the response below.)

~~~
carapace
Broadly speaking, mentioning downvotes is frowned on here and will get you
more downvotes. The exception (as far as I have seen) is asking people to
explain their downvotes, e.g. "Downvotes, please explain?" Sometimes that will
get you good feedback.

~~~
jnordwick
Don't care about more downvotes, my average comment score isn't the greatest
(I've never even cracked 1900 karma in many many comments over the years).

What does interest me is individual comments. It appears to my curiosity about
ranking things (like ELO and such in games and sports).

------
twoodfin
The description of the second paper’s conclusions don’t seem particularly
damning. Large active investors have a huge incentive to acquire relevant
information prior to big announcements. That’s why they have expensive
research departments.

~~~
rockinghigh
If that information is material and non-public, it’s considered insider
trading.

~~~
discoursism
Only if the information is acquired from an insider. If you develop exclusive
information without relying on internal sources, it's not insider trading. But
that is very hard to do.

I'm convinced that some amount of insider trading is going on. Just the other
day I was in a sauna at a gym in midtown and walked in on some bankers
discussing a deal they were working on and literally whether they ought to
illegal trade on their insider knowledge. They kept on talking about it for a
time while I was with them, and then said of me, "Better hope this guy's not
from the SEC!" It was pretty blatant.

Now these kids were idiots, so maybe they wouldn't even be able to make a
profit with insider knowledge. But if they're talking about it, I'm sure non-
zero numbers of people are doing it.

~~~
pbhjpbhj
Sounds like they were feeling you out as a mark.

~~~
discoursism
I'm quite certain that wasn't what it was, given the flow of the conversation,
but interesting idea nonetheless.

------
Pokepokalypse
Wait until someone figures out how to prove that by playing chicken with a
budget resolution, several key congressmen have learned how to game the VIX.

~~~
votepaunchy
If by “chicken” you mean a bipartisan agreement to end the sequester and boost
both military and domestic spending. And raise the debt ceiling. And whatever
else was stuffed in the 650 page “continuing resolution”.

~~~
murph-almighty
I don't think Pokepocalypse is wrong.

If two Senators time their investments right, they could easily make money by
shorting the market before manufacturing a budget crisis. Just use a third
rail issue that riles up your voters as an excuse ("This plan funds
abortions/provides tax cuts to fracking operations") and you have a reasonable
cover for your oddly timed transactions.

Disclaimer: I don't think this caused the current spate of shutdowns.

~~~
mobilefriendly
There would be legal jeopardy
[https://en.wikipedia.org/wiki/STOCK_Act](https://en.wikipedia.org/wiki/STOCK_Act)

------
overcast
Step 0: Forget trading on the stock market. You will lose.

Step 1: Pay off your high interest debts. School loans, credit cards.

Step 2a: If your company matches a 401k, take advantage of free money. Max out
their contribution.

Step 2b: Go to vanguard.com, open a Roth IRA, choose a Vanguard Retirement
that matches your retirement date, dump $5500/year in until you're 50, then
$6500 after that.

Step 3: After emergency money is handled, take excess invest in the following
index funds at Vanguard. Admiral shares require minimum $10,000 in each.
However you can start with the standard share version, and then move them to
admiral once your balance reaches $10k.

56% Total Stock Market Index Admiral Shares – VTSAX

24% Total International Stock Index Admiral Shares - VTIAX

20% Total Bond Market Index Admiral Shares – VBTLX

Enjoy your millionaire retirement status.

~~~
deelowe
With so many people doing this these days, I wonder if this will continue to
hold true.

~~~
overcast
What exactly is the alternative? Not investing your money? The entire world
runs on it. It's not going to change.

~~~
rectang
Want to be rich? Are you rich already?

No? Then too bad.

Because "equality of opportunity" in the US is only available to those who are
more equal than others.

~~~
hyprCoin
This sentiment is the driving force behind the popularity of many crypto
currencies. Crypto enables class mobility where there was none before. For
instance, purchasing $1,000 of Nano (XRB) at 10 cents (4 months ago) would be
around $87,000 now if it didn't get stuck on bitgrail.

~~~
capitalsigma
You can trade penny stocks in the normal market, too.

------
lettergram
My startup is actually targeting tracking "insiders", currently the working
project name is a bit different:

[https://projectpiglet.com/](https://projectpiglet.com/)

Although I have parked the "insideropinion.com" domain:
[http://insideropinion.com/](http://insideropinion.com/)

It turns out, that although there are a lot of insiders trading, people on the
internet love to talk about their companies. Recall the last time you saw, "I
work at Google?" on Hacker News?

That being said, I use it to trade regulrarly and similarly make money.
Although I would reocmmend diversification as the top comment here currently
says.

------
fallingfrog
What really irritates me is that for a whole generation of people, there is
really no other way to prepare for retirement than to throw your money into
the stock market via a 401k. And it's a rigged game. If you try to move your
401k from stocks to bonds it will take 2 full trading days; in that time the
market can drop 30%. The exit doors are narrow and you're not first in line.
Especially if you've put money in at the top of the market- expect to get
screwed.

~~~
tc313
It’s rigged against you if you’re implementing a strategy for which two days
makes a big difference. But buying and holding a diversified portfolio has
been shown to outperform the majority of hedge funds (after fees) over the
long-haul.

~~~
bjourne
Is that why 99.9% of the finance industry is about investments in which two
days makes an enormous difference?

~~~
semi-extrinsic
The reason why lots of the finance industry is about managed funds is that
they can create more money for themselves from charging clients fees than they
can from investing their own money in index funds.

------
Dowwie
links to the two studies cited in this article:

The Relevance of Broker Networks for Information Diffusion in the Stock Market
[https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2860118](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2860118)

Brokers and Order Flow Leakage: Evidence from Fire Sales
[https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2991617](https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2991617)

------
gesman
>> well-connected insiders profited even from the financial crisis.

THAT's when the biggest money are made.

------
Havoc
You need a study for that? They're literally making TV series out of insider
trading (Billions).

Everyone knows it's rigged, but that doesn't mean you can't make money.

------
jacknews
Nice to see proof of what everyone already knows.

------
jwcacces
I'm shocked... shocked to find that insider trading is going on in here

~~~
hinkley
Here are you winnings, sir.

------
kingkawn
I am stunned that absolutely anyone has ever thought that it was otherwise

------
adultSwim
No shit. There are party lines you can call that connect up company insiders
with traders.

So much money is on the line. There's a huge incentive to buy information.

------
bjelkeman-again
> Changing the law to fix that may not even be feasible

That seems a very weak conclusion. I actually expect more from the Economist.

~~~
__blockcipher__
IMO insider trading laws are unenforceable. Plus insider trading makes
securities more fairly valued.

Full disclosure: I’m a milton friedman fanboy

------
m3kw9
Some ceo giving you secret handshake before an unannounced event is very
simple to do

------
paulie_a
I for one am shocked... I am glad this is getting more thoroughly documented
though

------
tomcam
They should study Congress, where it is not illegal

------
zerostar07
That is good for bitcoin

~~~
bpicolo
Crypto markets have been insanely rife with insider trading- it's currently
unregulated.

~~~
Nuzzerino
Don't insider trading laws apply to _all_ securities? The SEC defines
cryptocurrencies as securities.

~~~
naveen99
Sec defines securities. Most ico’s fit that definition. Bitcoin doesn’t fit
especially if you are just mining or trading.

------
otakucode
When white collar crime is normalized and only lightly punished when very
rarely caught... why would anyone expect anything different? White collar
crime causes far more economic damage and kills far more people every year
than street crime does and this has been true for decades. But because society
focuses on street crime and gives the upper class the benefit of the doubt and
punishes them very lightly, white collar crime is normalized. It is very
difficult to change a situation like this because taking a behavior which is
viewed as normal in a social group and changing it do that it is viewed as
deviance is not something we know how to reliably do.

This is a serious problem with no real clear solutions. We know that
deterrence does not work, at least not in terms of making larger punishments
and assuming that will reflect in fewer people committing the act. Certainty
of getting caught is usually effective, but the monitoring of these sorts of
markets would need to be done by exactly the people most likely to collude
with violators. Until a person busted for insider trading or cutting corners
on safety regulations or releasing products are earnestly made to feel ashamed
and shunned by their intimate social group, I don't see much hope for change.

~~~
carapace
I'd say you're seeing the "hope for change" right here.

These studies and others like them are shining a light on our hypocrisy.
Sometimes it's a single researcher or even an amateur. And then there are the
leaks, like the Panama papers, the British Virgin Islands leak, LIBOR scandal,
etc.

~~~
marnett
the status quo is very powerful. unfortunately, things like these don't change
- not without revolt.

