Insiders generally look after insiders

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By Cormac Lucey

One of modern life’s great pejorative put-downs is to describe somebody as a “conspiracy theorist”. To be honest, I am comfortable with the label.

I am a suspicious person and I do believe that powerful interests very often suppress information about what they’re at and to gain information about what everyone else is up to.

Indeed, a theme that unites many of these columns is that, behind an awful lot of benevolent public rhetoric, lies systemic underperformance and, sometimes, abuse of power.

Academic studies provide evidence of abuse in the wake of the financial crisis. A recent one, Political connections and the informativeness of insider trades by Alan D Jagolinzer (pictured above) and others, published by the Rock Center for Corporate Governance at Stanford University, considers the private meetings that top American government officials held during the financial crisis.

Was information about the Troubled Asset Relief Programme (Tarp) communicated in advance to allow recipients to profit?

The paper examines the trading record of individuals who had worked in the federal government. In the two years prior to the Tarp, these people’s trading gave no evidence of unusual insight. But in the nine months after Tarp was announced, they achieved particularly good results.

The paper concludes that “politically connected insiders had a significant information advantage during the crisis and traded to exploit this advantage”.

Abel Noser, a firm used by institutional investors to track trading transaction costs, monitored data from 1999 to 2014. It focused on the 30 biggest institutional investors, through which 80%-85% of the trading volume flowed. They found that large investors tend to trade more ahead of important announcements, which is hard to explain unless they have access to unusually good information.

As George Bernard Shaw once put it: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.”