Now with SAC Capital Advisors, a multi-billion dollar hedge fund, under attack and potentially ready to shut shop, one wonders what is getting destroyed or created in this process. Who should be excited? Who should feel distraught?
Is it destruction? Rajat Gupta's wiki page labels him as a corporate criminal before talking about his philanthropist activities. Bad is stronger than good (November 1, 2012). Corporate criminal evokes a stronger context than philanthropy. Markets are ruthless. Steven A Cohen's wiki page does not indicate him as a criminal of insider trading yet. George Zimmerman, on the other hand, has no wiki page and has been acquitted from second degree murder. On the face of it, it seems that financial crime is worse than a probable homicide. But it's the society which has decided to punish the industry and its poster boys. And, since, negative mood does not know balance, the forces tend to exaggerate and will continue to have a "jail the bankers" approach.
What are we creating? Well, because markets are alive, the inefficient is pushed aside and the efficient takes its place till the cycle repeats. Who survives? The underdog, the underperformer, the inactive, the small size, the big size is cut down either by the society (antitrust) or proactively by the entity itself (downsizing). A girl complained at school about a mischief done by the boys. There were many boys. The girl could remember the few who were leading the mischief. Not everyone from the group came to attention and, hence, escaped the punishment; availability bias. Society always creates opportunities for the underdog, even if he is a part of the same industry under attack, a level playing field for David against Goliath.
Did information make money? Yes it did and it does. Though we may always want to kill the Bachelier financial random model, the fact that premium information delivers at a stock specific level cannot be contested. What we can contest however is how to quantify that premium with a commensurate return. Behavioural finance talks about information drift, how information tends to remain in the system for a longer time, making quantification of that premium harder. Moreover, now that a part of the society went too far with greed the other part tries to emphasize on ethics. "One has to play the game the right way". This is why the premium (insider) information model will become restrictive and more like a crime. "Please don't ask me about that stock because my distant uncle whom I have not spoken to in a few years works there". The regulators are now paranoid about insider information, even if the premium can or cannot be quantified. "We are going to mend the street anyway".
The demographic dip
First, Wall Street punished the analysts (Jack Grubman), then it sued the investment bankers (The Eliot Spitzer list) and now the Street is after the poster boys and so it should go on. In a way, the street is killing the industry it nurtured, so much so that it affected global liquidity. If you think this is just happening just in USA, you are mistaken. A part of Europe is already seeing a merger of sorts with the CEE Exchange. We are in one world today, where apps rule. You can trade anything and everything from your cell phone. There is higher volatility, higher fear and global impact. We are heading for a demographic dip in the financial industry, which is witnessing a manpower resource exit (forced or proactive). This exit will attain an exodus status if we believe Benner cycle works. The next round of cleansing is in 2020's (the very reason for a pause now for a few years).
Protected India?
Can India afford to be reckless and unaware? "Insider laws can't be implemented in India". Ok, India has the underdog advantage owing to lack of financial sophistication, emerging classification advantage, experts calling for the BRICS underperformance advantage, etc. But still protection is an illusion. If we don't self-police our self now, we have a high chance of going the wrong way because sooner or later, if we don't restrict the insider, the society will kill him and the neighbour standing next to him.
The author is CMT, and Founder, Orpheus CAPITALS, a global alternative research firm
