Monday, May 28, 2012

Insider trading: Facebook edition

From Matt Taibbi: regular investors got their now customary late-to-the-party treatment from Facebook, and some are suing.  But by now we know the game is rigged to favor the big, well-connected investor.
...virtually every week now we see stories like this that hint at a kind of two-tiered market system – in which most of the real action takes place inside an unregulated black-box network of connected insiders who don’t disclose their relationships or their interests, while everyone else, i.e. the regular suckers, live in the more tightly-policed world of prospectuses and quarterly reporting and so on. 
All of these stories suggest that Wall Street is increasingly turning into a giant favor-and-front-running factory, where the big banks and broker-dealers that channel vast streams of crucial non-public information (about the markets generally and their clients specifically) are also trading for their own accounts, and sharing information with a select group of "preferred investors," who in turn help the TBTF banks move markets in this or that desired direction by jumping on or off various pigpiles at the right times. 
Sooner or later, people are going to clue into the fact that one or two big banks, acting in concert with a choice assortment of unscrupulous "preferred investors," can at least temporarily prop up or topple just about anything they want, from Greece to Bear Stearns to Lehman Brothers. And if you can move markets and bet on them at the same time, it's impossible to not make tons of money, which incidentally is made at everyone else's expense.
This connects the dots between the farcical nature of SEC disclosure and the systemic problem of highly unequal access to the capital markets.  Maybe shareholders would benefit from more comprehensive SEC disclosure, but the unequal access problem cannot likely be fixed.  Ordinary investors are trapped with no where to invest without behind the scenes rigging ensuring high risk and low probability of returns.  Does the ordinary investor go back to storing her bank notes in the mattress?

No comments:

Post a Comment