The Empire of Edge

I had a mutual friend with the trader who gained inside information on the pharmaceutical stock that he then relayed to Martha Stuart. This trader(who I will not name, but can easily be found with a little googling) left his analyst position at SAC when the situation got messy then joined Front Point Partners as a portfolio manager. From what I understand, he was in the 8-figure range.

FrontPoint was then itself brought down by an insider trading case relating to the top level mgmt. I dont think the trader even received a subpoena. The sad reality is that there is probably no risk in cheating if you're not a high-profile manager. My assumption is that these guys can produce "research" after receiving a subpoena that muddies the water just enough for their lawyer to bail them out.

It's a high-trust environment, and I think very few judges would demand an official transcript. What's interesting is the risk-versus reward here. You can get disbarred many years into a successful career if this came to light. Meanwhile, clerking for a judge is mostly resume polishing. It's very educational, but you end up working the same job after your one year appointment, you just get to signal to your lawyer friends you had really good grades in school. To Martoma, that was apparently worth risking his career for an indefinite period into the future.

>The insider trading seems much the same. The sheer volume of those trades, coming less than a week before significant announcements of previously-secret information, was bound to throw up red flags. Did they have to short the stocks as well?

It really was clever of Cohen to generate this reputation of having a 6th sense for stock movement. It turns obvious insider trading into "gee that Cohen is a genius, I wish my intuition was half as good as his"

I bet a lot of his great trades involved some kind of insider knowledge but were put down to him having an uncanny ability to intuit the market.

I guess he didn't have such a great intuition for how far he can push a ruse before the authorities caught on.

There would have been no profit if it wasn't for the shorts, can't exactly sell $750m worth of shares quickly and without losses.

> why do we even bother policing this?

I wonder about this too. It's so rampant that I think we might be better off repealing the insider-trading laws and just telling the public that the game is rigged, and always has been. They would be safer looking out for themselves than thinking that insider trading is being effectively policed.

I'd agree with you to a large extent; a better, more precise way to put it would be to say that long/short equity hedge funds have to be engaged in de facto insider trading* in order to consistently generate enough alpha to attract investors. It's just too hard to consistently be smarter than the market on both your long and short bets, especially when it's a larger cap stock whose float has constant inflows and outflows of institutional capital.

That said, there are other asset classes which, ipso facto, do not lend themselves to insider trading, such as commodities and distressed debt. And there are definitely many traders in these spaces who consistently post outsized returns, which is why they get paid so much.

* I include in this definition not just stuff that will get you sent to jail, such as solicitation of MNPI from company employees, but also the more gray-area tactics commonly used by long/short analysts. Chief among these is speaking to "industry consultants" who give traders their "personal perspective" on certain companies, which in other words means paying them to relay the gossip they hear from their loose-lipped friends who work at various publicly traded companies.

There's a difference between having non-public information and insider trading.

Simply not true - there are plenty of areas where consistently good returns are generated, however they aren't the best and they aren't too consistent.

The first hedge funds were successful because there was little competition, they could conduct things like arbitrage because no-one else was. The problem is that such strategies don't work generally with scale, and there is so much money in hedge funds that they can't all conduct such activity profitably and thus the opportunity is overcrowded.

Some active traders maintain their advantage by having such a high built in advantage that they have effectively monopolised a specific area, often through using technology and data mining. They are happy to sit on their strategy and keep reinforcing it to keep that advantage.

Finally there is the successful strategy of actually investing in companies over the long hall. Hedge funds don't do this, people like Warren Buffet do. Surprisingly few companies, even pension investors, properly do this (riding through bad patches without firing the investors for instance) and thus there isn't nearly as much competition as you would think - very few companies genuinely invest over a 10 year time frame for instance.

I can certainly see how one might think that, given this case. But having looked at some consistently profitable strategies, I am quite convinced that there are people with real, legal edge in the market. You wouldn't believe some of the things people exploit, they can very very small things.

I remember interviewing a guy whose whole thing was to make electronic markets in a product at the price where the price increments changed (think 8-9->10<-12-14). I didn't pursue it. Yet another guy found a small quirk in a niche market related to baskets of securities. Quite often they are things that have a cap on the money that can be extracted. A friend of a friend has an obscure electronic strategy that makes him a few million bucks a year, but can't be sized.

Then there is also a whole class of people with some sort of information privilege. Market makers who hear about a big order first (because their broker has got to call somebody first), or participants who are at a natural information aggregation point (people with a lot of connections).

In the HFT space, there's also a whole load of things related to reg NMS rules that ordinary participants are possibly not aware of.

It seems to me that all you need to gain above average return is to identify someone who will accept below average returns.

For a long time US shares that paid high dividends were disadvantaged from a tax perspective compared to those that paid low dividends. So if you are a zero tax entity (retirement fund) you could reasonably consistently outperform by selecting those companies which pay high dividends.

I work for a company where we are first banned from trading for a period, then given shares, which we must then sell over a certain period to get a particular tax treatment. We always feel that the shares trade lower over the period we must sell. And higher when we can't sell.

These are all fairly public, and I think just the tip of the iceberg.

And that would be a very uninformed opinion.

Think of it like this: traders and everyone in the finance business devotes their entire working life and career to figuring out how to trade.

Programmers spend time learning, creating side projects on Github, poking through open source projects, working on projects at work, etc... In the decades that span a normal career, that's a lot of code and a lot of learning that a programmer accumulates, which is why they're able to create nice things.

Traders are the finance equivalent of all that knowledge (the good ones anyway). You don't think that after so much experience, it might be possible that a trader can make money in the market without cheating?

The traders that do cheat though, do so because of greed, not because it's impossible to make money...

From the article: 'The Department of Justice announced...that Cohen had presided over insider trading "on a scale without known precedent in the hedge-fund industry."'

It's the page <title> published by The New Yorker (line 9)

The summary -> no charges against the head of this insider trader, but an agreement with the government to only invest Cohen's personal assets of nine billion dollars.