Congresscritters Aren't Like The Rest Of Us

This last few weeks, we've heard a lot about research conducted by Ziobrowski et. al. (see here and here) on the possibility of informed trading by Senators and Congressmen. Based on abnormal returns earned on their portfolios, it appears that they do use their "inside information" in ways that would be illegal for those not in government service. In case you haven't seen it, here's the 60 Minutes story that brought Ziobrowski's research into the public eye:


Now here's another fun fact - Congresscritters not only get to profit from material nonpublic information, they also get to reveal it to select parties too. It seems like a number of hedge funds regularly meet with members of congress to get fast track access to this information. Here's a video from the Wall Street Journal for your viewing pleasure.



And here I though our elected officials were pure of heart and above approach (sorry - I think I shouldn't have changed my meds without doctor's orders).

"Piggybacking" In the Brokerage Industry (From Knowledge@Wharton)

Are market makers "naive providers of liquidity -- uninformed players operating from behind a firm Chinese Wall", or do they trade on information they get from insider trades? According to a new study by Christopher C. Géczy, adjunct finance professor and director of the Wharton Wealth Management Initiative and Jinghua Yan, a research analyst at Tykhe Capital, it looks like the second possibility is looking a lot more likely.

The Wharton researchers, in a detailed parsing of four years of insider trading at 15 of Wall Street's largest brokerages, find that market makers executing insider trades at these firms appear to act on information gleaned from those trades.

The evidence can be seen in the more aggressive prices they set for the company's stock following an insider trade. Put another way, compared to their peers, market makers affiliated with the brokers used by insiders post more aggressive ask quotes during periods when insiders trade. The study was undertaken using information from trades made between March 1999 and November 2003.

"Academics and, to some degree, those who trade in the market, might assume that market makers are there simply to take the other sides of trades and provide liquidity, whereas it looks as though they may have, and may act on, information," says Géczy. "What we found is that there is a leakage somewhere along the lines in the information transmission channel between the investor -- in this case, company insiders -- and ultimate trades, and the way information is transmitted into the market in the form of buy or sell orders."

They also find that the pattern becomes far less pronounced following the passage of Reg .FD.

It's worth a read - the study has a lot of implications both for the models we use to describe market-making behavior, and for regulators of financial markets. Plus, it's thorough and well written.

Read the article describing the study in Knowledge at Wharton here, and you can get the actual study on SSRN here.

Mark Cuban Charged With Insider Trading By SEC

Mark Cuban, HDnet founder and owner of the Dallas Mavericks was just charged with insider trading by the SEC. The commission alleges that Cuban received a call from tje Mamma.com CEO about a pending PIPE offering of Mamma's stock. The call was supposedly prefaced by a disclaimer from the CEO that the information was confidential. The SEC complaint alleges that Cuban then used this insider information to sell all his Mamma.com shares in after-hours trading, thereby avoiding a loss of about $750,000. In case you're interested, here's a link to the complaint.

It should make for an interesting case. Cuban has the resources to fight this thing pretty much as far as he wants (even potentially all the way to the Supreme Court), and is definitely stubborn enough to do exactly that. He's already posted a response to the complaint on his blog:

Mr. Cuban stated, “I am disappointed that the Commission chose to bring this case based upon its Enforcement staff’s win-at-any-cost ambitions. The staff’s process was result-oriented, facts be damned. The government’s claims are false and they will be proven to be so.”

Not surprisingly, Stephen Bainbridge has a very thorough legal analysis of the issue. After all, it's in his wheelhouse.

In the meanwhile, I have SAS programs to run and papers to write.