The SEC will act even when it has no one to put the cuffs on. Recently, it filed a suit against unknown investors who had profited in the options market before the announcement of a takeover of TXU, the Texan utility. Over $ 5 million of profit from these options has been frozen; while investigators try to identify who bought them. Insider trading is hard to quantify, but regulators see evidence that it is alarmingly common. The boom in mergers has provided more scope to make a dishonest buck ahead of deals In Britain, almost a quarter of takeover announcements in '05 were preceded by suspicious price movements, according to the Financial Services Authority, the country's markets regulator. In America, reports of suspect trading patterns filed by the NYSE to the SEC have doubled in the past two years.
Banks have responded by tightening internal checks on wrongdoing. But these are only as good as the people who apply them? One of the 13 busted ring members worked as a compliance officer at Morgan Stanley. It was "like the head of the CIA turning over secret info to Osama bin Laden," as a pundit put it.
Banks dealings with hedge funds are also coming under scrutiny. Hedge funds were big beneficiaries in the Morgan Stanley case and last September, Linda Thomsen. SEC's enforcement head singled out insider trading by hedge funds as a particular threat. Mutual funds have long complained that Wall Street broker’s give advance warning of big 'block trades’ to their favourite clients; and the apples of the brokers' eyes are increasingly hedge funds. Then there are some like the late Milton Friedman, a Nobel laureate in economics, who argued that insider trading should be legal, because it benefits all investors by quickly introducing new information to the market. Why should everyone have to wait for a company's press release?
The issue of insider trading is riddled with grey areas. At what stage, for instance, does sounding out interest among institutional clients for an upcoming corporate financing become something sinister? These fine lines are one reason why cases against insider trading are so hard to build. It is rare to find a smoking gun. The SEC and others use algorithmic programs to catch unusual peaks and valleys in trading. Though cutting-edge, the maths takes them only so far. Proving intent, says Mr. Ricciardi, requires plenty of "good old fashioned detective work."
Banks have responded by tightening internal checks on wrongdoing. But these are only as good as the people who apply them? One of the 13 busted ring members worked as a compliance officer at Morgan Stanley. It was "like the head of the CIA turning over secret info to Osama bin Laden," as a pundit put it.
Banks dealings with hedge funds are also coming under scrutiny. Hedge funds were big beneficiaries in the Morgan Stanley case and last September, Linda Thomsen. SEC's enforcement head singled out insider trading by hedge funds as a particular threat. Mutual funds have long complained that Wall Street broker’s give advance warning of big 'block trades’ to their favourite clients; and the apples of the brokers' eyes are increasingly hedge funds. Then there are some like the late Milton Friedman, a Nobel laureate in economics, who argued that insider trading should be legal, because it benefits all investors by quickly introducing new information to the market. Why should everyone have to wait for a company's press release?
The issue of insider trading is riddled with grey areas. At what stage, for instance, does sounding out interest among institutional clients for an upcoming corporate financing become something sinister? These fine lines are one reason why cases against insider trading are so hard to build. It is rare to find a smoking gun. The SEC and others use algorithmic programs to catch unusual peaks and valleys in trading. Though cutting-edge, the maths takes them only so far. Proving intent, says Mr. Ricciardi, requires plenty of "good old fashioned detective work."
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