Insider Trading / by kevin murray

The market capitalization of all United States stocks is about $18.6 trillion dollars with nearly 50 percent of all Americans owning stock or equity of some sort whether in their own accounts, their IRAs, or their pensions.  The stock market is news Monday through Friday when the markets are open and there are at least three television programs that dedicate their operations to it (Bloomberg, CNBC, and Fox Business).  Additionally, there are plenty of media that essentially cover the equity, bond, and investment markets such as Barrons, Wall Street Journal, Forbes, and Fortune.   Finally, the richest of the rich in America are almost certainly invested in equities and their return on investment on these equities is of material concern to them.


Not too surprisingly, the nature of the game is to make money on money and for those skilled brokerage firms, mutual funds, and hedge funds that are able to maneuver successfully and to create market-beating returns they are richly rewarded for doing so.  It is common knowledge then, that the powers to be will do whatever it takes to get every competitive advantage, to work every angle, to nurture and create networks and connections that will give them an edge over the other players, recognizing that the more successful you are the better the compensation and perks.


Having said that the Securities and Exchange Commission rule § 240.10b5-1 states that you are engaged in Insider Trading when you: "… purchase or sale of a security of any issuer, on the basis of material nonpublic information about that security or issuer, in breach of a duty of trust or confidence…"   That rule seems to put a damper on the party but in fact, it hardly slows it down, as anytime that you are dealing with human greed, money, power, and billions upon billions of dollars, where there is a will there will be a way. 


It doesn't take a genius to recognize that in order to get ahead of the competition you need some sort of edge on them and while there are plenty of avenues to pursue, there doesn't seem to be any better road to take than the one that will enable you to receive or solicit pertinent news that is of material use and is known ahead of others in which they too would desire to obtain that same sort of news.  This then becomes the opportunity to work from facts rather than suppositions or rumors and doing so will give you that material advantage over your competitors and will often make you money.


Of course, the above reflects a violation of the securities trading law and is considered to be "Insider trading", but like it or not, Wall Street is always about trading on knowledge that is not available to the general public.  After all, for the movers and shakers on Wall Street your job has always been to act upon actionable information.  Your contacts, your moves, your conversations, your connections, are all about a symbiotic relationship in which one hand helps the other hand and those that are able to access material information on either side of the aisle are highly desired.


The SEC would have you to believe that a few rogue traders are acting on illegal insider information, but in reality it is pervasive, common, and part and parcel of the equity industry.  Insiders of Wall Street have privileged information, connections, and access to power that you will never achieve and that's just the way it is.   In fact, truth of the matter is, our life revolves around giving and receiving insider information in our personal relationships, at work, or in the public.  Insider trading is more of the case of those not in the know, not so much seeking justice, but suffering from the pangs of envy.