Jordon Belfort, Wall Street from the 90s, Scam 1992.
Insider trading was supposed to be a thing of the past
Yet if you live in the United States (~25% of you), you wake up every day to a politician disclosing a profit of 1900% within a few days by trading stocks that just happen to be in the same industry that they regulate.
Research has proven decades ago that enforcement of insider trading laws leads to a significant decrease in the cost of equity and increase in market liquidity, have more dispersed equity ownership, more efficient stock prices, generate positive trading velocity and reduced volatility and bid-ask spreads.
(If some of those terms seem alien to you, you can sign up for the Complete Value Investing Playbook here)
We know that detailed insider trading rules and surveillance reduce the number of insider trading cases (Aitken et al., 2015 in case you were curious).
Yet in a time with more surveillance technology and regulation than ever, how is the United States still struggling to curtail blatant insider trading? How have other nations solved this issue?
(BTW, if you’re interested in global business news, check out It’s The Mix-up)
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Let’s take a look
As usual, I’m not going to bore you with the technicalities of the 4 levels of insider trading laws (you are free to look them up) but I’m more interested in why a nation like the United States is unable to curtail it among their politicians?
Well simply put, insider trading is hard to define.
Furthermore, it’s even harder to prove.
If your uncle catches an innocent glance at the CTO’s briefcase and notices paperwork for an upcoming acquisition, mentions it to you in small talk and you buy stock options to exercise that information? Yep, jail.
Well, not really.
Even if someone at the appropriate regulatory body (SEC, SEBI, etc.) had your unusual flow flag up on their system, how would they prove that your uncle truly got a glance at that one specific briefcase?
Even if they were to somehow be able to prove that, they still have to prove that you had an intent to trade on that insider information and not the fact that you were going to take that trade anyway.
That’s the elephant in the room … intent
It’s rare that the a regulatory body finds a smoking gun like this instance where an MIT postgrad literally Googled “How SEC detects unusual trades” before trading on insider information (How did this guy get into MIT?)
Combine that with the fact that regulatory bodies all through the world are engaged in an incredibly uphill battle.
The SEC’s budget for fiscal year 2023 was around $2.15 billion, to put that into context, JP Morgan alone spent $14 billion on IT in 2023.
There’s a reason politicians like Vivek Ramaswamy have been calling for a complete ban on trading for people holding office, after all, if your calling is to serve your nation faithfully, surely investing in an index fund like an average individual should be enough?
Is a complete ban on trading for politicians likely? Not really.
For now, Nancy Pelosi and her husband will make millions of dollars every quarter directly at the cost of average individuals in the market like you or I, but perhaps the growing awareness regarding this issue and calls for a complete ban from figures like Vivek will move us a bit closer to a fairer market.
If you’re interested in this topic, I found this video from CNBC pretty useful