The Secret of Billions
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I see this misconception all the time & I'm really surprised to see it in this context. The sine qua non of "insider trading" is being an insider. If I know of a merger because I overhear the parties talking about it in a restaurant, or I've hired private investigators to see who's visiting who's offices, there is no issue. There has to be some relationship that obliges me to keep that information private. The only way markets work is by surfacing "private information".
"The essence of stock market law in the US is this: every transaction has to have risk in it. If you eliminate risk by, for instance, paying for information that nobody else knows, then you have committed a crime."
That's just completely wrong. If I hire a satellite to track car dealer inventories, buy Ford as a result, and make a ton of money, I'm doing my damn job. No one has committed a crime. Ditto if I sell that data rather than trading on it directly.
They also prosecute people for trading linked securities.
Everything you wrote was wrong.
http://www.sec.gov/spotlight/insidertrading/cases.shtml
You see friends, hackers, recipients of information, and more charged, successfully.
"The Supreme Court said in 1983 that people who trade on confidential information can be prosecuted only if the insider reaped a benefit from the leak."
The convictions in this case were recently overturned:
"With Nvidia, the disclosure began with an employee in the company’s finance unit who provided earnings numbers to a friend, who then passed the information to an analyst. The information made its way to Newman and Chiasson through the same circle of analysts involved in the Dell leak....Prosecutors said the information earned $4 million for Newman’s fund and $68 million for Chiasson’s."
Of note: "In overturning the convictions, the appeals court said prosecutors needed to show that the person disclosing the information received a clear benefit -- something more than the nurturing of a friendship...The appeals court also said the person being prosecuted had to know about the benefit."
In short, the only way to be convicted of insider trading is to directly pay off someone inside the company for the inside information.
[1] http://www.bloomberg.com/news/articles/2015-10-05/insider-tr...
It's unfortunate that there isn't something that says that.
Additionally, you can even trade on non-public information as long as the insider does not benefit in any way.
Anyway, the NYT did an article about this recently (with respect to Phil Mickelson's insider trading case)
http://www.nytimes.com/2016/05/21/sports/golf/in-the-clear-p...
http://www.scotusblog.com/wp-content/uploads/2015/08/15-137-...
His writing is the worst kind of merger of self-help, armchair psychology and social commentary.
What happens with the edge cases? e.g. I play golf with an insider and he tells me to buy Ford stocks, but doesn't profit himself (at least not directly).
See https://www.sec.gov/news/speech/speecharchive/1998/spch221.h..., http://www.bloomberg.com/view/articles/2016-01-19/justices-w..., and https://www.bloomberg.com/view/articles/2014-12-10/appeals-c...
Or https://www.bloomberg.com/view/articles/2016-05-20/insider-t... for a recent example
There is also a distinction between the SEC's civil remedies, which theoretically can reach out at a few degrees of separation (eg the Phil Mickelson case recently, where IIRC he unknowingly profited from a tip relayed from a guy who got it from an insider), and criminal liability.
For example, testing Lumber Liquidators wood for chemicals or reverse engineering (assume legally) Volkswagen ECM code.
In the US, this is all legal -- as long as you're not breaking laws to collect the data, you're free to trade on any info you collect. Unfortunately, many of the unscrupulous publicly traded companies are Chinese and the laws are much more fluid around embarrassing companies there.
A good article: http://www.reuters.com/article/china-shortsellers-idUSL4E8K4...
Or see any research by Muddy Waters (among many other short sellers): http://money.cnn.com/2012/05/02/markets/muddy-waters-carson-...
More on point, some anonymous investors made billions shorting airlines on 9/11. That's like a perfect storm of insider trading ("As long as we're wrecking the airline industry with a terrorist act, let's short some stock on it make a bundle!").
I forget how much HN wants the law to work like code. It does not. Intent matters. Circumstances matter. Context matters. Of course, money does, too.
Here is a good start to read on subject:
https://www.techdirt.com/articles/20130416/08344222725/congr...
That's how you get average poor/rich individuals like N. Pelosi and H. Clinton going from $100k per year to racking up $300MM in fortune within 10 years.
That's not correct. The STOCK Act, as noted in the Techdirt article you cited, prohibited members of Congress and many other government officials and employees from trading on non-public information for profit. This was enacted in 2012.
The STOCK Act was amended in 2013. The amendment changed the disclosure requirements for some government employees, but NOT for Congress. All of the STOCK Act prohibitions and reporting requirements remained in effect for Congress and remains in effect to this day.
In addition to Congress, the amendment also did not change anything for the President; the Vice President; people running for Congress; Deputy Secretary of Defense; Deputy Secretary of State; Deputy Secretary of State for Management and Resources; Administrator, Agency for International Development; Administrator of the National Aeronautics and Space Administration; Deputy Secretary of Veterans Affairs; Deputy Secretary of Homeland Security; Under Secretary of Homeland Security for Management; Deputy Secretary of the Treasury; Deputy Secretary of Transportation; Chairman, Nuclear Regulatory Commission; Chairman, Council of Economic Advisers; Director of the Office of Science and Technology; Director of the Central Intelligence Agency; Secretary of the Air Force; Secretary of the Army; Secretary of the Navy; Administrator, Federal Aviation Administration; Director of the National Science Foundation; Deputy Attorney General; Deputy Secretary of Energy; Deputy Secretary of Agriculture; Director of the Office of Personnel Management; Administrator, Federal Highway Administration; Administrator of the Environmental Protection Agency; Under Secretary of Defense for Acquisition, Technology, and Logistics; Deputy Secretary of Labor; Deputy Director of the Office of Management and Budget; Independent Members, Thrift Depositor Protection Oversight Board; Deputy Secretary of Health and Human Services; Deputy Secretary of the Interior; Deputy Secretary of Education; Deputy Secretary of Housing and Urban Development; Deputy Director for Management, Office of Management and Budget; Director of the Federal Housing Finance Agency; Deputy Commissioner of Social Security, Social Security Administration; Administrator of the Community Development Financial Institutions Fund; Deputy Director of National Drug Control Policy; Members, Board of Governors of the Federal Reserve System; The Under Secretary of Transportation for Security; Under Secretary of Transportation for Policy; Chief Executive Officer, Millennium Challenge Corporation; Principal Deputy Director of National Intelligence; Director of the National Counterterrorism Center; Director of the National Counter Proliferation Center; Administrator of the Federal Emergency Management Agency; Secretary of State; Secretary of the Treasury; Secretary of Defense; Attorney General; Secretary of the Interior; Secretary of Agriculture; Secretary of Commerce; Secretary of Labor; Secretary of Health and Human Services; Secretary of Housing and Urban Development; Secretary of Transportation; United States Trade Representative; Secretary of Energy; Secretary of Education; Secretary of Veterans Affairs; Secretary of Homeland Security; Director of the Office of Management and Budget; Commissioner of Social Security, Social Security Administration; Director of National Drug Control Policy; Chairman, Board of Governors of the Federal Reserve System; and Director of National Intelligence.
For other government employees, the change was that their required disclosures no longer had to be filed electronically or made available electronically. The disclosures are still available to the public, but on paper rather than online.
I would also take issue with Altucher's statement that you're not allowed "to make money on" insider info. Insider trading liability is about trading on the info, whether or not you make money, or even lose money, on a particular trade. It's just a lot easier to catch people who make money at it.
Now, it could be that as a recipient of training, I've been made excessively paranoid but this is how I read it. But lawyers love torts based on "tainted" things.
He obviously means pay someone _on the inside_ to get such information.
As is the case with his first definition.
Exhibit 1: Preet Bharara's misguided pursuit of US v Newman: http://www.wsj.com/articles/bhararas-supreme-court-miss-1444...
Even the Supremes are itching for a good case to clarify the law: http://www.wsj.com/articles/scalias-insider-trading-invitati...
The big players, I would say the C-levels and board members of the 147[1], or the other central big players[2], have the ability to manipulate and move markets in a way that I believe qualifies as insider trading... but they have so captured the regulatory market, to the point that the SEC is a gutless, teethless entity that only chases middle-men. Once again, multi-tiered justice creates an environment where all the middle-men are just going to cheat all they can until they get caught because they are just emulating the bosses!
Not to mention that even if they do get caught, almost never are the fines enough to discourage the act, so they see it as a win! Just offer up some low on the totem-pole scapegoat sacrifice, and be on your merry way. (Looking at you Bank of England and LIBOR scandal....)
The entire financial industry is a ponzi scheme of corruption, and I've said it before, and I'll say it again, the supranational bankers are more terrorists than the people with thwabs who we like to think of as terrorists. (plus, where do you think they get funding in the first place? Follow the money, and the money certainly doesn't end in a cave in Afghanistan.)
1. https://arxiv.org/pdf/1107.5728.pdf 2. https://www.sg.ethz.ch/media/medialibrary/2013/12/james_glat...
edit: Anyone downvoting care to actually respond please? I understand my statement about the supranational bankers being terrorists is a jarring statement, so I am willing to discuss the matter in further depth...
But it does so by creating agency problems. Either directly or indirectly, the information being traded on in these schemes comes from people who work for the shareholders of the company. A particular problem is that insiders can profit both from the wins and losses of their employers; it's the magnitude that matters, not the sign.
There's already a lot of evidence that company insiders, particularly in management, will routinely harm their employers for their own personal benefit (see, for instance, abusive stock buybacks). It doesn't seem smart to create new mechanisms for that to happen.
This also explains a lot of the SEC's actions. The important part is not that there be a fair market; it's that there's a perception of a fair market, so that new participants will be willing to trade. Hence they go after high-profile cases like Martha Stuart, while letting most cases slide.
Informed trading is a prisoners' dilemma, in which loyalty to "the pact" distorts markets while defections from it make information public. As you observe, C-suite reptiles benefit most from informed trading. Please note, however, that insider trading laws actually increase the benefits they receive, by punishing "outside insider" defectors. Eliminating this ill-conceived and inconsistently-enforced law would actually decrease the advantage that management takes of owners of public stock.
We also tend to forget that prosecutors are only supposed to be bringing cases that they are certain they can win. Criminal prosecutions aren't speculative.
Finally, people like to point at the Martha Stewart case as evidence that prosecutors are celebrity obsessed. But Stewart was swept up in the earlier prosecution of several other people associated with ImClone.
I consider insider trading laws to be of a different nature. As mentioned above, these laws create a situation in which naive investors suffer more harm and self-serving executives reap more gain than they would in the absence of these laws. Without insider trading laws, new "inside" information would set off a race on the part of all knowledgeable insiders to profit from that information, thereby quickly informing the broader market. The positions of public firms would be much clearer, to every investor. Investors could still gain or lose money in the market, but executives could no longer structure their investments and incentive packages over the medium term so as to profit most directly from their inside knowledge.
In this new more permissive regime, I'm sure some executives would attempt some straight-up shareholder robbery. But the speed required to succeed at such schemes would make their actions obvious to the investing public, to prosecutors interested in charging more prosaic crimes like fraud, and to tort lawyers interested in breach of contract. After a time we'd have at least some executives who had been incentivized toward honesty enough to actually become generally honest.
But the big gun, to hold in reserve?
New.
Paragraph.
Fun background info: even though the author denies it, the show is loosely based on Steve Cohen of SAC Capital (now family office Point72, after insider trading charges from US Attorney), who the author had a short encounter with. And the "career coach" psychiatrist in the show played by gorgeous Maggie Siff bears resemblance of the famous psychiatrist Ari Kiev floating on the SAC floor.
[1] http://www.bloomberg.com/news/articles/2016-01-14/showtime-s...
[2] http://nypost.com/2015/08/14/embattled-hedgie-inspires-showt...
Just try it: how successful and glamorous does your rich banker friend seem when you describe him as an obtainer, rather than as a creator of wealth?
Banks deliver value too, unless you prefer to do all your transactions in cash that you pull from under your bed and you never need a loan for anything.
Rent-seeking is indefensible pretty much by definition, although I think people tend to perceive many things to be rent-seeking that actually aren't.
And I would suppose that there's an acceleration with wealth, right? Like a cosmological constant of wealth gap, reset in some places every once in a very rare.
Edit: I realized I didn't use the most accurate language. "... you're probably doing something unfair" would be a better characterization.
Did Bill Gates 'break the law' by essentially creating a monopoly? Technically yeah, but is that really a law anyone actually cares about?
No, read section 2 of the Sherman Act.
> Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony
The only legal form of monopoly is one that comes into existence without anyone intentionally creating it.
That's about wealth and Capitol gain, not income.
Fairness is in quotes because it's a complicated word.
There is also an argument about holding onto large amounts of wealth being difficult without expending some of your resources to protect it. If nothing else, taxes spread the burden of the security apparatus around. If you have more to lose, you pay more to protect it.
>Or do you disagree with a progressive code?
Depends very much on the country, but in many cases yes. I believe that it can create a situation that disincentives paying taxes altogether.
In my case instead of paying almost 50% tax rate I've moved all of my income into a friendlier legal climate where I only have to pay a tenth of that (something a lot of people can do for only a few grand).
Although it's also worth noting that I've got ethical issues with financially supporting the Finnish government, and those have played no small part in my decision. I'll gladly expand on that if you want.
Actually, the justice system even actively rewards law enforcement for abusing their powers in a blatantly illegal manner. In this country we don't have the concept of "fruit of the poisonous tree", which in combination with police writing their own search "warrants" results in a perverse system where they can just march into anyones home. seize whatever they want and no matter what that'll be admissible in court.
Now, it might actually be possible for this system to actually work if there was some level of accountability here. But no, if a police officer straight up falsifies the reasoning behind a search warrant, they will not face any kind of repercussions for that. Why would they? It's a win for them. Only thing you'll get from suing them is a symbolic piece of paper that says that the police acted wrong, and maybe a few hundred euros in compensation.
Unsurprisingly, Finland has repeatedly lost cases relating to such searches in the ECHR. Very little has resulted from those losses.
I got a notice from the government collections agency that they will start seizing two thirds of any transfers to my Finnish bank accounts to pay for a debt that was paid three years ago.
This has already been sorted out in the courts a year ago, a judge has confirmed that I did in fact pay said debt in 2013. Nevertheless, today the collections agency decided that it can just ignore the courts decision and start seizing my funds.
I just tried calling them, not once but four times. Each time I was given a different phone number to call, and each time nobody picked up. In fact two of the phone numbers had full voicemail boxes. Finally I managed to get an email address out of them.
This is the kind of incompetence that the Finnish government allows to thrive, I've been trying to sort this out for 3 years now and have received several acknowledgements that it's sorted out. I even had a court confirm this.
I feel that such incompetence simply shouldn't have a place in a civilised society.
For example, as a young lawyer, I played a small part on an M&A deal where there was suspicious trading by some UK-based hedge funds. All the lawyers, bankers, and principals on the deal received a letter from the SEC asking for a list of every person who may have had knowledge of the deal, what they knew, and when they first knew it. That went as far as listing secretaries who were physically stationed near our office, whether or not they worked on the transaction. Nothing came of that investigation, which as far as I know may be the usual result. There are certainly stories where the SEC or DOJ have managed to establish amazingly tenuous connections between tippers and tippees. Presumably the badguy will not just volunteer "hey I give stock tips to my college buddy". But I think if the suspicion is high enough, the regulators can be quite systematic in tracking down leads.
One hacker group was trading ephemeral insider trading tips on snapchat.
They got busted because some old fart had an email of a screenshot of the tip.
"I don't get snapchat" use your imagination
Regardless of market direction - you always win (a stressed clientele with reasonably deep pockets).
http://www.jamesaltucher.com/2011/04/10-reasons-you-should-n...
Last year he started selling a system for buying stocks:
http://www.timothysykes.com/2015/09/the-best-new-stock-marke...
"I would estimate 90% of hedge funds commit crimes along the way."
No way. It's a material number, but it's not 90%. Even if the author is using "hedge funds" here to refer to "long-short equity hedge funds"; the latter are often quite sketchy and operate close to the line in terms of hiring consultants who basically traffic in insider information. But the 90% estimate is asinine hyperbole.
"The 20% is the percentage of profits that the hedge fund manager takes. So if a one billion dollar hedge funds returns 10% (about the same as most mutual funds on a good year), then the profits are $100 million and the hedge fund manager makes an extra $20 million for himself (20% of $100 million)."
NOOOOOOO NONONONONONO.
The 2/20 fee structure gives GPs 20% of the carry above a specified hurdle rate that is usually in the mid-high single digits. So, in this example, if the hurdle rate were a relatively industry-standard 8%, the GPs would have earned $4mm. Not $20mm.
A tiny fraction of hedge fund managers would be infringing any laws, if at all. Excluding the over-the-counter markets(!), the better you are as a hedge fund manager, the more you know what can make you money, what can lose you money and which of your decisions were wrong and which were right: there is no room to blame it on other people doing insider trading.
I agree with you that there might be a few funds that are considered so hot that their GPs could get away with not having a hurdle rate; do you know of any by name?
FWIW, my understanding is that if you're a super-in-demand fund, the power move is keeping the same hurdle rate in place (maybe even raising it as a demonstration of confidence in your skills as a money manager) and also raising the carry rate.
In other words, going from a 2/20 structure with an 8% hurdle rate to something like a 2/33 structure with a 10% hurdle rate. I believe a few of the Tiger baby funds have done this.
Which is a form of subsidizing speculative bubbles.
The Fed provides a mechanism to the market to create money by borrowing from the Fed, and repaying at interest. Entities allowed to borrow from the Fed (banks) are strictly regulated. If they think they can make money by investing what they borrow, and it stays within the strict capitalization laws, then they borrow. That grows the money supply. So the Fed doesn't actually "print money". It provides a mechanism for the money supply itself to grow, based on market demand. The prime lending rate sets the cost of that growth - if the economy is growing too fast (too much demand), they increase the prime, increasing the cost to banks and limiting growth. If the economy is shrinking, they reduce the prime, making it cheaper for banks to lend money (and businesses to borrow), stimulating the economy.
Economic growth is simply an increase in production relative to inflation. High inflation hurts growth (by eating into profit). Deflation (negative inflation) hurts growth by making it profitable to simply stuff money in a mattress rather than investing. Economists long ago figured out that low but positive inflation is the right place to be. The Fed manipulates the prime to try to keep things there.
Questioning the "ethics" of this is questioning the ethics of the very concept of a free market.
not sure what you mean by 'ethics'
it is clearly a construct, just like the concept of money in the first place or the idea of democracy or the authority of police, or the constitution, etc
as a society we agree on certain things and then live within this framework
"power resides where men believe it resides, it is a trick, a shadow on the wall..."
Everybody's money loses value when they print notes. That's where it comes from.
Yup, that's how currency gets into circulation. How else would it?
How do you suggest money should be created? By wasting labour and capital and polluting the environment to dig it out of the ground?
The fact that it's cheap and easy to create (and destroy) according to supply and demand is a benefit.
Indeed, especially since creating your own currency is illegal in many (most? all?) countries.
If possible, avoid the words "groupthink", "mob mentality", "sheeple", and their synonyms in your answer.
I think a better explanation is hidden in this phrase. The authour writes:
>> Trading is very stressful. I hate it. I would make a bad trade and I would feel my blood pumping all over my body all day long. And then if the trade was a loss I would cry at night. I was so scared all the time. I hated it.
On one hand it makes me feel a little better that this happens to even successful people. But on the other hand, you cannot be a trader with this kind of attitude.
Suffice to say that not everyone has the same problem. Sounds to me like he's justifying his own actions in retrospect, at least a little. Does recounting a grab-bag of fun anecdotes say anything about the real problems in finance? I like James Altucher a lot, but I expected more here!
If you haven't already watched "Billions" [1], it is an absolutely thrilling show. I was uncertain about it after the pilot, but I continued because of my experience with Showtime's "The Affair" [2].
I did not regret that decision. It is in my opinion the second best show of last season, after "Fargo" [3] of course.
[1]: http://www.imdb.com/title/tt4270492/
The song sort of goes the complete opposite of that :).
If I can make it there, I'll make it anywhere. It's up to you, New York, New York.