The biggest prosecution of hedge fund insider trading went into overdrive this week with 20 people, including Galleon Group LLC co-founder Raj Rajaratnam, getting hauled up on criminal charges. Bloomberg has the rogue’s gallery of all the names of the people behind the insider trading.
We can expect a debate over the next few months over whether insider trading should even be a criminal offense. James Altucher writes in the Huffington Post that maybe insider trading shouldn’t even be illegal, claiming that it would expose fraud earlier, it would put more information out in the market and that companies will become more transparent.
The problem with that argument is that insider trading screws ordinary investors by giving insiders an advantage. Now, the market is supposed to be a level playing field. Altucher would no doubt argue that’s crap, the market is not a level playing field at all.
Which in itself raises another question. If the market is not a level playing field, how widespread is insider trading? As former hedge fund manager Andy Kessler writes in The Wall Street Journal , stock markets trade on information.
“As long there have been markets, there have been those who have tried to get an edge.” Kessler writes. “Whoever could get the first news from a battlefield, of an oil discovery, or figure out that a company’s earnings were better than anyone expected could reap almost instant profits. Edward Calahan invented the stock ticker (later improved by Thomas Edison and Alfred Vail) just so J.P. Morgan could sit in midtown and get stock quotes from the New York Stock Exchange faster than anyone else. Everyone else had to wait for the Dow Jones Customers’ Afternoon Letter with closing prices. Now it has come to the point where firms are spending millions and putting wicked fast computer servers next to exchanges so they can have an edge and, through a system of high-speed or “flash” trading, figure out which way individual stocks or the markets are heading before anyone else.
“Can individual investors compete?”
It’s a good question, suggesting that insider trading is actually common practice. And with the way the market is traveling, we can expect prosecutors to throw the book at many more. The Galleon case is just the beginning.
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