Bloomberg’s recent article, “Insider Trading isn’t what you see in the Movies,” contained only one thing that I agree with…the title. Beyond that, it was just another example of contriving a story to meet predictable conclusions.
As depicted in movies such as Wall Street in 1987 and the more recent Wolf of Wall Street, a typical perpetrator is reckless and flamboyant. He — and I mean “He” — does drugs, runs with hookers, owns expensive artwork, and crashes expensive cars with no remorse! However, Bloomberg’s article points to a much more sordid outlook. According to the research, the median insider invested about $200,000 per tip and received $136,000 in profit. For the author to call this rather “sordid and petty” crime is somewhat odd. Since when have hundreds of thousands of dollars in profits in a matter of days become petty in our society? According to the census ACS survey, the median household income for the US was $53,657 in 2014. Only about 20 per cent of American households even break the six-figure mark, according to Census Bureau data. Hence, I would say that a six-figure profit in a few hours or days is a lot of money for any one.
The bigger point here is that neither of the above-mentioned movies or the recent show “Billions” depict a typical insider trader on Wall Street. Even if you do not like the characters portrayed as working on Wall Street, they do a ton of hard work. The stock picking process has many inputs; to name a few: talking to the company management, investor relations and various sales channels, evaluating competition, sector favorability, market conditions, interest rates environment and recent stock price action. The insider information is an input, “a powerful input,” and is another piece that solidifies the original investment thesis. This asymmetrical advantage with the inside information not only allows to improve the Risk-adjusted return on capital (RAROC), but can also create superlative profits during the earnings or a buy out event.
The law enforcement press conferences and the movies depiction of an insider trader, sipping drinks and schmoozing and getting the information to trade is simply sensationalizing the data gathering. A typical insider trader on Wall Street, and I was one of them, works very long hours, and is constantly challenging the investment thesis and looking for inputs to confirm his/her investment idea.
During my tenure on Wall Street, I lived on West Coast and started my day at 5:30 AM (Since the market opened at 6:30 AM). I would be scanning company news, doing online research, visiting companies, calling IR or going to investor conferences/bus tours. After market close, I would be listening in to the company earnings conference calls and would be working on earnings models. I had to feed the research data I gathered into the earnings models and expectations to confirm the investment thesis. My working day was 10-12 hours, which typically started early mornings and stretched into late evenings. This was hardly a person lying on the beach, sipping drinks and exchanging information to trade!
The glamorization of the job with hallmarks of excessive spending as shown in movies and TV is missing the over consuming and cut throat competitive nature of this job. Yes this work is financially very rewarding but the performance pressure is intense. You are as good as the last trade and one is spinning really hard to stay ahead of the next analyst, or a fund manager. A bad call made by an analyst can cost the company millions of dollars and some times one’s job. When one of my recommendations would go awry, my congenial boss had no problem yelling at me.
However, in spite of intense pressure on Wall Street analysts to be right, it does not justify gathering the inside information. The Kool-Aid that insider trading is victimless is just not true! The world of electronic exchanges makes the losing investor distant and anonymous and hence the winning insider trader mistakenly feels that there is no harm being done.
The next question that needs to be asked, is the criminalization of insider trading justified? Albeit, a moralistic contempt for the vice of greed in insider traders provides a motivation, but one’s own vice of envy for easy money made by insider traders offers another explanation. For better or worse, insider trading has been made a level of evil disproportionate to its economic impact.
For young professionals thinking of pursuing jobs on Wall Street, one needs to comprehend the tenacity and ferociousness of working hard to succeed in this business. The glamorization in the movies does not truly depict the long hours that go into putting together the mosaic to succeed. However, the most perilous aspect of working in this industry is falling prey to temptation of easy money and throwing away every thing one has worked for!