Thursday, August 31, 2006

Regulators? We don't need no stinking regulators!

Today's WSJ has an article on possible insider trading in CDS titled "Can Anyone Police Swaps?" Its a follow-up from an article I commented on back in July. The gist is that investment bankers may have tipped off some people in the hedge fund community about impending transactions involving HCA and Anadarko Petroleum.

First of all, it isn't as though Average Joe investor is getting ripped off here. We're talking about the CDS market, where the sizes are such that only professionals are involved. Second, as I said back in July, it was already all over the place that HCA was a LBO target. The Journal itself reported so days before the alleged insider trader occurred.

Legally, yes, its insider trading if you know something for a fact while the rest of the world only knows it as a rumor. And if such a thing became rampant, the market's credibility would be damaged, ala China's stock market. So I'm not excusing insider trading. I will say that hedge funds make up an inordinate percentage of big dealer's trading business. With so much money at stake, and with hedge funds able to steer business however they choose, brokerages are going to go out of their way to win trades. This might meant that information sometimes slips. Its not ideal, but is it really that damaging?

I'm suspicious that any attempt to regulate the CDS market will result in greater costs for all investors with minimal benefit. The stock market has far more regulation, but it seems there is no reason why this same trade couldn't have occurred on the NYSE as the CDS market had the circumstances been different.

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3 comments:

Jay said...

Continue to enjoy your daily updates. I do think that it's hard to reconcile a regulation environment where Martha Stewart goes to jail, but giant broker customers may act under timings which seem rather suspect, yet get a pass. I think you could make the same argument for the stock market - quite honestly, if insider trading was allowed, it would still quickly become public information, as the market is efficient, and "knows all", and it would simply be a matter of trying to get in early, just like with an IPO, to catch the wave before the market processes every new scrap of information and equalizes valuations.

Incidentally, your 'Peridot Capitalist' link is broken, I believe 'peridotcapital' is the prefix you were looking for. Starting to add some of your links to my daily reading

Tom G. said...

Fixed the link. Obviously I'm not saying insider trading isn't an issue, I'm just hardly surprised its going on.

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