Saturday, August 6, 2016

The Reality of Insider Trading

Tyler Cowen summarizes some new research on insider trading, based on the cases of more than 600 convicted traders:
Some aspects come pretty close to what we see in the movies. The average insider trader is 43 years old, and nine out of 10 are male. The practice also seems correlated with some features of recklessness: Insider traders are younger than their associates, less likely to own real estate, and have fewer family members on average. More than half have criminal records, with almost all charges stemming from traffic violations.

To my eye, the most striking data involve personal connections: Insider traders appear to be pretty careful in choosing their accomplices. Of the known pairs of people who provide and act upon private information ("tipper and tippee"), 64 percent met before college, and 16 percent met in college or graduate school. Another 23 percent are family relations -- more siblings and parents than aunts and uncles, despite the added capital that the latter might have provided. Tips are also commonly shared among people with ethnically similar surnames: Of 24 tips coming from people with Celtic surnames, for example, 14 went to individuals who also had Celtic surnames.

The choice of accomplices demonstrates how hard it is to trust people you haven’t known very long, especially if you're not all that trustworthy yourself. It also implies that modern corporations are, in some ways, more honest places than one might think. Not that people are always so law-abiding; rather, many workplace relationships may be too superficial and too transient to develop the trust and cooperation typically required for villainy and law-breaking.
The median profiteer invested $200,000 and made a profit of $136,000 in 21 days. Nice money if you can get it, but hardly enough to retire on. On the other hand the mean profit was $2 million, which means that a few people really raked it in. And as Cowen points out, the biggest and smartest players may be harder to catch.

1 comment:

Shadow said...

I'm reminded of the time the SEC threatened to prosecute (then settled) with the 15-year-old who hawked penny stocks on Yahoo Boards and the like. He and his mom met with the SEC and answered their questions. Afterwards the kid went right back to hawking his stocks. When asked why he would do this when he already risked being prosecuted, he said something to the effect: I'm not doing anything those traders and hedge fund managers aren't doing every time they appear on CNBC. He was right.

At the time the SEC threatened him (arrested him?) he had made over 800,000 in the market. The SEC's theory was the kid had no evidence (data) these companies would outperform the way he claimed. Not too long after this incident Wall Street started bundling high-risk, subprime mortgages and selling them as good investments despite evidence to the contrary. The SEC did nothing. Almost no one was prosecuted and responsible executives walked away with lucrative golden parachutes. But people who had nothing to do with the insanity lost their jobs and some their homes when the credit markets started crashing.

But the SEC nailed the 15-year-old.