Market Transparency for Whom

The FBI and U.S. Justice department have been very busy arresting and prosecuting insider trading cases.  Some of these insider trading cases are so called "expert networks" where a matchmaking process is used.  One example of a matchmaking tie up is between employees and investors at public companies.  Employees are compensated for passing along proprietary or insider company information to investors, just not to the degree that investors are.  Consider an insider tip on a potential mergers and acquisitions transaction where generally there is a premium paid to the target or acquired company, a premium that could be 20 - 30% above the current stock price before public disclosure.  That return beats the stock market everytime, which for the S&P 500 has been 11%  (CAGR) from 1950 - 2011.  Insider trading is a risk mitigation strategy. 

A more sophisticated form of "expert networks" is the matchmaking between investors and the U.S. Congress.  Lobbyists are an overt example.  Lobbyists are intelligence gatherers.  It is a misnomer to assume that lobbyists are only senders of communication.  Between 92 - 94% of communication is estimated to be non-verbal and if a lobbyist has any training in reading micro-expressions, then a U.S. Congressperson is giving a whole hell of a lot away.  Add in a travel junket or dinner meeting, paid for by lobbyists, and the reciprocity principle is triggered.  The reciprocity principle is a habit formed from a civilized upbringing where parents train children to be nicey, nicey when someone does something nice to you.  To call it quid pro quo is to give it an unnecessary edge because quid pro quo implies a choice or control, however the reciprocity principle is a habit and harder to control.

Now, switch the prey and the predator images - U.S. Congresspersons gleaning insider information from the intentions of lobbyists.  Then add in the specialized knowledge of U.S. Congresspersons on committees.  Investing is about finding the sweet spot and for U.S. Congresspersons the sweet spot is where regulation and business meet or deliberately do not meet.  That has equated to a 6% advantage for U.S. Representatives and a 10% advantage for U.S. Senators in the stock market.  The Executive Branch is restricted from trading in-person through the use of blind trusts, however it is a porous wall so a complete ban would be the only real solution to what is essentially a breach of fiduciary duty by both branches. 

Wall Street investors would like to be self regulated when it comes to enforcing rules on insider trading, yet the U.S. has decided that that is a bad idea.  And somehow the U.S. Congress has different standards.  The STOCK Act, introduced in 2006, was only recently revived by the U.S. Congress as a public relations strategy.  Since an outright ban on trading is not going to pass because of the self interested nature of the legislation, all blind trusts should be administered by a government entity with accountability and a strong firewall.  Allowing U.S. Congresspersons and the Executive Branch to have their blind trusts administered through existing relationships is akin to trying to hold water in one's hand.  Financial services companies are not a solution either as the client relationship focus ensures a firewall vulnerability.

It is unlikely that Preet Bahara, U.S. Attorney for the Southern District of New York (S.D.N.Y.), will be on the steps of Congress or in front of the White House speaking on the new arrests and prosecutions for insider trading because that is not where Wall Street is located .... or is it?  There is a reason why politicians spend millions of dollars on being elected to an office that only pays $170,000 or $400,000 a year.