We drift again, as we often do, into the murky world of insider trading. It’s one of the most common forms of securities fraud and it takes little to understand just why it’s so prolific – it is very hard to pin down. The terms are vague and the enforcement is complicated.
We, as a society and an industry, have not yet figured out how to stop insider trading. It’s clear that it’s important to crack down on the violation since the implication of a rigged game spoils it for everyone. If average middle-class investors don’t buy stocks because they think rich people are getting away at their expense, even the rich won’t benefit from capital appreciation. So, in the end, it’s bad for everyone, even those at the top.
We also know that there are time when insiders, like managers and minority shareholders have to purchase stocks. And that’s actually been dealt with fairly well – we have regulations that require managers to declare every trade and certain windows where they can’t trade at all. It isn’t water-tight, by any means, but it is somewhat effective.
Another sort of potentially problematic trading is the kind that is done on knowledge of what the industry refers to as, “material nonpublic information.” That means if you know something that is likely to impact the stock price, and you trade based on that knowledge before the public knows about it, you’re guilty.
Keep that in mind it pays to look a little closer at how information relevant to trading goes public. Of course, there are requirements for companies to make official public statements, but that’s not really how most investors get their updates. Most actually get updates through the media. Journalists report on the key issues, and that’s where things can get a bit tangled.
Most veteran journalists are likely to tell you their sources have their own motives for divulging information that is newsworthy. Even a regular viewer of House of Cards can tell you that. Inside sources aren’t parting with vital information out of the goodness of their hearts.
Iraj Parvizi, from the UK, knows this well. He’s on trial in Britain right now for insider trading. In his court appearances, he’s said that it was easy to figure out what the journalists he was speaking to were likely to print the next morning. His words were likely to send the stock up or down by multiple percentage points, so why not take advantage of that?
Parvizi was so successful at manipulating stocks through the media, that he went from owning a small kebab shop to amassing a £70 million fortune over the past few decades. “The whole stock market is built on lies,” he says.
Whether or not the whole stock market is, in fact, built on false information, is up for debate. But one thing is certain; we still don’t know the true extent of the illegitimate relationship between the media and investors and the degree to which it impacts the market.