You’ve probably heard the term insider trading, but what you probably don’t know is its apparently a lot more rampant than previously assumed. Insider trading is when someone either buys or sells stock according to tips they received that were not available to the public at large. According to a study reported by the New York Times as much as 25% of all trades involving public companies may be affected by insider trading.
The study was conducted by two professors at the Stern School of Business at New York University (Menachem Brenner and Marti G. Subrahmanyam) and one professor from McGill University (Patrick Augustin). After pouring over hundreds of transactions between 1996 and 2012, the three professors focused on those with stock option movement as a way to decide if there was any foul play within a 30 day period leading up to a major transaction.
The New York Times quoted the professors as saying the Securities and Exchange Commission prosecuted only “about 4.7 percent of the 1,859 M.&A. deals included in our sample.” In other words, the majority of those whom they found guilty of insider trading were never investigated by the S.E.C. Though the Justice Department and the S.E.C. have made insider trading one of their top priorities, a single case can take as long as two years before it comes full circle.
In a move to seem more proactive though, the S.E.C. recently hired Palantir Technologies, who has helped monitor terrorist activities in the past. Their hope is Palantir Technologies will be just as proficient at catching white collar criminals. But according to the research trio the government still has a lot of ground to make up.
The New York Times quoted Professor Augustin who said “The statistical evidence we present is consistent with informed trading strategies, and is too strong to be dismissed as just random speculation.” The three professors claim that the bigger the company and the large the volume of trading in the stock, the more likely there will be instances of insider trading.
Insider trading is nothing new to Wall Street. When profits can literally be in the billions, the lure of all that wealth is too much for some people. The shock should not come from the news that insider trading exists, but how rampant and widespread it has turned out to be.
Photo: Crains New York / Ennis
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