Insider Trading is Very Damaging to Markets and a Terrible Crime, Unless Your Job with the SEC Forces You to Do It


Interesting bit from Slate (via Business Insider) from last week tracing the shockingly good record of Securities and Exchange Commission (SEC) employees when it comes to making trades at the right time in stocks of companies the SEC investigates.

Turns out reseachers found "SEC employees tend to sell a company's stock before the SEC takes enforcement action against the company" leading to:

abnormal returns of about 4 percent for the market in general, and about 8.5 percent for the U.S. stock market. That's significant….60 days before an enforcement action, when the market is selling at a rate of about 50 percent, SEC employees are selling at a rate of 71 percent. The SEC employee rate of sales increases as the enforcement action approaches, while the wider market's pretty much stays the same.

Nothing wrong with this though, says the SEC. It's a feature, not a bug, of working for them:

Before an employee works on a case, they must divest themselves from any interest in the company. So it makes sense that employees sell their stock in a company before enforcement action. It just happens to also be profitable.

I am not implying that SEC employees should face legal sanction for their trading on very material information that only they are in a position to know. It's a fact that every trader (and every non-trader) may in the nature of reality of life on Earth know things that other people don't or can't easily know, and indeed markets couldn't work without this fact. They work most efficiently when those who know true things that might affect value get to act on and have market prices reflect that knowledge.

It just should make you wonder about any criminal action based on one's choices about when to buy or sell (or not buy or not sell!) stocks. 

I have written in the past about the weird crime of insider trading, and Michael McMenamin wrote for us in 2003 a feature on "St. Martha" when Martha Stewart was bedeviled by those laws.