Shocking studies investigating insider trading on Wall Street suggest investing in shares is rigged and not limited to the occasional lone rogue trader.
Three studies have looked at hundreds of financial institutions and thousands of traders and others who have worked on Wall Street – the home of the New York stock exchange.
One scrutinised the secret but later made public TARP – Troubled Asset Relief Program – which was an unspoken deal between financial institutions and the US government about how to split billions of dollars of bail-out cash if needed after the financial crash.
The research argued that knowing in advance how TARP would work was a vital piece of intelligence for a fund manager or trader.
Comparing how the trading performance of some individuals in the two years before TARP with that of the year after showed some posted significantly improved returns.
“Political connections appear to have played a role in the allocation of these funds,” wrote Alan Jagolinzer, professor at the University of Cambridge’s Judge Business School. “Thus, politically connected insiders at leading financial institutions were in a position to be disproportionately privately informed about the scope of government intervention.”
Another report found evidence that hinted that large firms of stockbrokers tended to trade more in the run-up to important announcements, which suggests they knew what was going to be said before everyone else.
These large firms make money because their clients get a chance to dump shares before a fire sale
The studies conclude individual investors and small brokers are the losers because they can never benefit from insider information.
The argument continues that this makes the market rigged against the individual because an inner sanctum of those in the know make significant gains at the expense of the public.
Some insider traders are caught and punished by the courts but giving up the occasional individual does not mean the real perpetrators are ever uncovered and that financial institutions close ranks to protect their own.
What is insider trading?
Insider trading is buying or selling shares, currency or commodities with the benefit of non-public information.
In some cases, insider trading is illegal because the dealing can unfairly influence the market in an investor’s favour.