Is this really insider trading, if none of the alleged perpetrators were insiders, nor was there anyone breaching a duty to protect the information. It seems like they'll have a pretty strong defense on this point.
It's insider trading if you trade based on non-public information. So if you tell your family that your company is going to do something that will influence the stock price and they trade using that information (no matter how vague that information was) they are guilty of insider trading.
The worst part about this is that I've heard they wouldn't have been captured if they didn't get greedy and increase the size of their trades and continue to reuse the same trading accounts.
Allegedly they were hacking into news services and reading news before it was publicly released, which means their investing time frame was measured in hours and minutes.
This makes it much easier for the SEC to find this type of behavior as these types of trades, especially in the options markets stand out, when done at large sizes.
The SEC takes alot of grief, some well earned, but you should assume that when a stock moves, they'll run an automated scan of every trade that profited from that in the days/hours leading up to that move and over time they'll cross reference those trades to watch for accounts that continue to do this over time when they have reason to suspect illegal activity.
Think of it like athletes blood samples being held for years after competition. They won't test all the samples held but they have the data there to look back on if they find a reason to.
The worst part about this is that I've heard they wouldn't have been captured if they didn't get greedy
I've heard before that getting greedy is one of the most common downfalls, and that fraudsters who can manage the scale of their fraud are the hardest to catch. For example, there was some guy who got hold of a $1 printing press. He produced & laundered modest amounts of fraudulent bills for something like 20 years and was never caught; they only figured it out when a certain $1 printing press was found in his estate sale.
Think of it like athletes blood samples being held for years after competition. They won't test all the samples held but they have the data there to look back on if they find a reason to
So you're saying the athletic governing bodies are guilty of illegal vein-tapping, and have some kind of blood bank of every athlete ever somewhere out in the Utah desert...? :)
If these trades were being done by DB or Citadel, there'd be a slap on the wrist. But if you're a rogue trader, or god forbid a lone 30 year old in your parents basement, off to the big house for you.
If anything this just shows that the SEC has all the tools in the world to stop illegal activity, yet it does nothing, so long as you're part of the Wall street establishment.
I do not think you can support the argument that Citadel can steal pre-release press releases and trade on them with any evidence.
We get it: you think the law is different from big firms and little firms. Stipulate that it in many ways is, and that still has nothing to do with this case, in which a large syndicate of criminals actually set up a SAAS business selling tradable pre-release press releases.
But if you're a rogue trader, or god forbid a lone 30 year old in your parents basement, off to the big house for you.
What? No. They broke into servers at PR Newswire and Business Wire and used the stolen MNPI to make trades. There is nothing about rogue or lone traders here. This was sophisticated international group of hackers and traders engaged in obviously illegal behavior.
really? so Steve Cohen isn't part of the Wall Street establishment? How about Raj Rajaratnam and Rajat Gupta -- the last a board member at Goldman. Just started his two year stretch in the federal pen.
I agree with you in general. There have been successful prosecutions which have resulted in significant jail time. Although the Supremes have yet to weigh in on the latest batch[1], and right now it's not looking good for the Feds.
But I disagree with you about Stevie Cohen. Quite a few of his underlings took a fall, but he personally emerged scot free. He simply wrote a very big check and made his problems go away. He's busy managing his remaining billions in a "family office".
LOL, Steven Cohen is your example of SEC getting it right?
He's the best example of how the insiders are allowed to do it, while everyone else is not. As long as you call it an "experts network" and as long as you structure your corporate hierarchy properly you can do insider trading all day every day! Just ask Steven Cohen.
> If anything this just shows that the SEC has all the tools in the world to stop illegal activity, yet it does nothing, so long as you're part of the Wall street establishment.
How does it show anything at all about what the SEC does with the establishment?
A trading account is much like a bank account. You can't just open a whole bunch of them, it takes a fair bit of documentation. And there's only so many banks you can do it with. You'd have to draft a bunch of people and send margin to all the accounts.
Perhaps a smarter thing to do would be to try to drown out the profits with noise from a market neutral basket. A gentle updraft in the PnL would be much harder to detect, and compounding would mean you'd get pretty rich anyway.
You could, but you'd have to be disciplined to the max, since the easier and logical thing to do would be to invest all of your resources into things that give you the best return, so you maximise your earning.
> Allegedly they were hacking into news services and reading news before it was publicly released, which means their investing time frame was measured in hours and minutes.
Contrary to an economist's default assumptions, information doesn't travel instantaneously, and not all actors are immediately logical. To put it another way, there's a delay where profitable arbitrage is possible with widely-distributed information because many large players are slow-to-move.
In short, there is reaction time - sometimes a 2-4 day window - between when news is released and share prices get where they're going. So those hackers had even more lead time in executing.
Unless you know this for fact, I'm doubtful. At my last company, we released both earnings & press releases after market close, with earnings reports being released on the same day as our earnings call (so, press release at 4pm ET, earnings call at 5pm ET).
Nobody gives the SEC grief for taking out foreign economic criminals. They give the SEC grief for focusing on tiny players in the market while the large players write/enforce their own set of rules and regulations.
Like most enforcement bodies, they focus on ease of enforcement vs. what they should be actually enforcing. And they hate starting actions that they think they have a good chance of losing. Little guys cannot defend themselves. Big guys can.
You can theoretically succeed at this as long as you stay within a statistical random probability and can maintain absolute secrecy.
This is essentially what Alan Turing realized he had to do with the information decrypted from Enigma... He had to let enough bad things happen so that German analysts wouldn't see a statistical red flag, signifying an information leak, but he had to divulge enough to steer the war to victory for the Allies.
Which particular instance of HFT firms getting early data are you referring to? Different people might be talking about wildly different things when they say that.
The general answer is going to be: the HFT's early access doesn't implicate a principal/agent problem. The people generating the data HFTs act on don't have a fiduciary duty to the shareholders of the companies they report on.
Interesting so as long as the data is released to everyone at the same time, it doesn't matter if some people are able to acquire that data before it reaches others. As tptacek pointed out below I didn't think about it in the principal/agent framework.
Why would the NSA monitor everyone in the world but not its employees' activities on their internal databases? Security within the NSA would have to be pretty terrible if employees were running their own hedge funds on the NSA's data without the NSA noticing. That said if it did somehow happen they might be prosecuted against intelligence laws rather than financial law so they wouldn't have to reveal aspects of their internal data into public evidence in an insider trading trial.
> Security within the NSA would have to be pretty terrible if employees were running their own hedge funds on the NSA's data without the NSA noticing.
I believe this is one of the points that Edward Snowden was trying to make. He himself could have had a hedge fund, and he could have used private information he gained in his NSA contracting before that information became public knowledge.
Hell, his coworkers were getting in minor trouble for stalking their exes.
Be real, Top Secret clearance checks routinely look at finances, and employees are told to report colleagues purchases that seem out of place. Not necessarily because they are running a hedge fund, but more likely are receiving money from the "KGB" to steal secrets.
But who is going to make sure of the spy's spying on the spy's?
We actually live in a situation where the government has more power than the Starzi and everyone has passively accepted this. The end of freedom with zero violence and complete obedience.
Not to worry I'm sure the people in charge will always use these systems to do good things. Please don't come get me! Thanks.
I would imagine it's at least somewhat rare. The indicators for espionage and insider trading are quite similar: most spies are caught because of sudden affluence. Making a ton of money off insider trading is going to set off a lot of red flags and likely trigger an investigation.
tell that to Aldrich Ames. His coworkers reported him in 1989 for living a life of affluence (if I recall right, he bought a brand new Jaguar and actually drove it to CIA headquarters, even though he wasn't making more than $65k a year or thereabouts). But he wasn't arrested until 1994.
The, like, inimitable Matt Levine (I know, right?):
http://www.bloombergview.com/articles/2015-08-11/why-not-ins...
The SEC complaint, which is chock full o' details:
http://www.nytimes.com/interactive/2015/08/11/business/dealb...