Insider Trading and Wall Street’s [Un]Ethics
from Peter Radford
I’m bored with debt defaults. No one seems to worry about them, so I won’t.
How about insider trading? That sounds like fun.
The much heralded Galleon case and the guilty finding against a well respected money manger has confused Wall Street. The boys and girls down there are throwing a hissy fit. How can someone with a little bit of information not be expected to try to make a buck? After all the whole point of getting those special hints, clues, and facts is to end run the market, make a fortune, preen in fancy restaurants, and retire early in order to serve the public as an official in the Treasury Department. Well, maybe not that last bit.
The point is information is the grist that makes the market work. So he, or she, who has information, has a nugget worth a great deal. Since sharing is not a gene found in these folk’s DNA, they naturally like to hoard and then deploy these nuggets to their own advantage.
This game is time honored. It’s the way the world works.
Enter the heavy hand of government and its apparent infinite desire to screw up the happy lives of these hard working people. Some bureaucrat somewhere decided that the boys and girls should share. This is being seen as both ridiculous and an invasion of civil liberties.
The reason I am thinking about this is that today’s FT has a letter from two professors: Robert McGee, a professor of accounting, and Yeomin Yoon, a professor of finance and international business. The letter gives a very spirited defense of insider trading. It is, the professors say, beneficial for markets.
There are four lines of defense for insider trading given in the letter:
- Insider trading can be beneficial to markets
- Not all insider trading cases are fraudulent
- Insider trading can sometimes be seen as a “victimless” crime
- If it is a crime at all, an argument can be made that the resources deployed to litigate it could be better deployed elsewhere
There is no evidence submitted to bolster these four points, so for our purposes we will call them assertions, not arguments.
Let’s start with assertion number 4.
One obvious so-called better deployment of resources would be in the addition of ethics classes to be taught alongside the good professors own classes in accounting and finance. Evidently the professors don’t see a public need to trust the markets. Or that excessive insider trading and the lack of transparency it implies undermines the workings of a market via the loss of trust between traders. I am not sure how the knowledge that someone could be trading with another on the basis of hidden knowledge helps a market become more efficient, or how it helps the allocation of resources. The notion that a market has an public or social element slips by the professors. They see a market as a sandbox for the boys and girls to play in any way they want. If some poor shareholder is ripped off in the rush for bonus money, then so be it. Tough. There is no obligation to share information that might alter the wealth of millions. Not if some smart trader can get there first. After all that’s why we call them smart. They have no qualms about cheating. Trust is so yesterday.
Take a look at assertion number 3. Insider trading is sometimes “victimless”. Really? How? So some trader makes a quick buck and buys a new Hamptons home. No one was hurt. It’s not like a robbery or anything. Right? This is absurd. Only a person so deeply mired in market ideology can overlook the small point that shareholders are a class of people. If one makes a gain disproportionately on the basis of hidden information, the others were precluded from so doing. They lost by inference. Theirs is a real loss of opportunity. Unless, of course you don’t believe in such things. Then again, if those silly fools over at the pension company weren’t smart enough to play racket ball with Joe from accounting at ABC Inc. why should they get the opportunity? They must be dumb. I love pampered prep school people making the rugged individual argument. It sounds so … well, authentic. No?
On to assertion number 2. Not all insider trading is fraudulent. No. Some is just cheating. Look: the point of getting rid of insider trading is to level the playing field, and thus to give everyone access to the best available information. This means that if a trader gets hold of relevant information that information should be shared as widely as possible. Not hoarded. And not focused exclusively on one small group of individuals for their own benefit. It is the exclusivity that makes insider trading unethical, not the potential for fraud.
And assertion number 1. This is just plainly ridiculous. Those professors should be disbarred, or drummed out of school. Here I was thinking that markets work on the basis of perfect information. All that wonderful information flying about the place, free, universal, available to all in a very 1960′s sort of way, this is the very heart and soul of free market theory. Any attempt to disrupt that freedom necessarily throws the entire market haywire. Quite how insider trading improves upon perfection I don’t know. Nor do the professors since they don’t articulate any such reason. They simply assert it as fact. I am not a huge fan of unadulterated markets. I think they fail. In fact I think all markets are destined to fail. But that’s just me. People who want to defend markets as the best places for the socially beneficial allocation of resources shouldn’t go around advocating limiting those markets, ignoring their public aspect, excusing cheating, and above all, calling the introduction of an imperfection helpful. It very odd to listen to a couple of pro-market guys argue that those wonderful markets could benefit from a little backdoor juicing now and again.
It make me want to scream.
Here we are then: two professors of finance or accounting willing to debase the very machinery they advocate in class. Either they don’t understand finance and accounting. Or they are confused. Or they are, perhaps, hypocritical. They certainly disregard the existence of a public interest in the workings of markets.
And that is the bigger message in their letter.
They encapsulate the reason we had the last financial crisis. The ethical basis of trading has collapsed. To the professors, to those they teach, and to the managers who manage the boys and girls of Wall Street, the market has become a game within which anything goes. Reputation means nothing. There is no fiduciary responsibility. Clients are fair game to be tricked out of their money. Information gained in one board room can be used to profit in another. Banks can bet against their own customers on the assumption that everyone is cheating so they should too. The entire point of deregulation appears to have been to open up the chance to cheat. Insider trading is a last vestige of the bulwark we had against massive cheating. The rest has been tossed overboard. And, if these two professors are anything to go by, we are teaching the next generation of traders that the anything goes philosophy is just fine.
How can you teach efficient market theory, and then advocate that inefficiency is sometimes a good thing?
Ugh. Now my head hurts. I think I’ll go back to pondering our debt default mess.