Insider Trading Among the Affluent
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Insider trading is the buying or selling of stock based on information that is only available to a select few. It can be considered legal or illegal depending on how the transaction is conducted. According to the U.S. Securities and Exchange Commission, it is legal when the change of hands is reported to the securities regulator. It becomes illegal when it gives the buyer or seller an unfair advantage over the investing public. In recent years, there has been a noticeable increase in the number of affluent people engaged in insider trade.
There are many possible reasons why the rich individuals and families would take part in transactions of this kind. Among the possible explanations for this are:
the presence of hedge funds;
insider trading programs offered by investment firms; and
power play
Hedge Funds
Hedge funds are private pools of capital owned by affluent individuals. They sustain their businesses and make them grow by focusing on the securities with high yields or on distressed bonds or debts. They buy stocks or debts that are priced well below the market. They start earning once the stock price would rise. How do they determine which debts or securities to buy or sell? The funds’ owners are very wealthy individuals with political connections and friends in high places. Politicians are not obliged to keep silent about upcoming regulations. They talk freely with people they mingle with, especially when those people have contributed to that politician’s campaign. Because of this, hedge fund owners can often get very useful information that they can use in deciding whether to buy or sell stocks. Additionally, hedge funds’ owners can afford to hire people to lobby and get hold of market-relevant information.
Investment Firms
Investment firms help their wealthy client manage their estates. Aside from estate planning, they also provide tax umbrellas so that the affluent will only need to pay minimal taxes. In addition to these services, investment companies have created a new way of making their affluent clientele spend and earn more money. For instance, JP Morgan Private Bank has a 10b5-1 scheme, which offers wealthy customers a chance to become richer by getting involved in insider trading the legal way. Section 10b5-1 of the U.S. Securities Code describes what is considered illegal insider trading. The investment bankers have found ways to legally circumvent the rule. Because the scheme does not pose legal risks, affluent individuals are naturally attracted to it.
Power Play
It is also possible that there is an increasing need among the affluent people to reassert their power in a country where there is no defined social strata. They probably feel the need to reaffirm their self-worth by influencing and manipulating capital markets. Obtaining privileged information provides them a different kind of satisfaction.
It’s also likely that affluent people are into insider trading as a result of greed. It’s not the first time that people who have more financially would want to hold on to their assets and increase them. They need to earn more and expand their wealth. Insider information can give them an easy way of multiplying their wealth. Other than the money, getting inside information can be used by the affluent people to control others or ruin their enemies.
Works Cited
“Access Liquidity.” JPMorgan Home Page. 12 June 2008
http://www.jpmorgan.com/pages/jpmorgan/private_banking/corporate_executives/access_liquidity
“Hedge funds, politicians and insider trading.” SOX First Home Page. 12 June 2008
http://www.soxfirst.com/50226711/hedge_funds_politicians_and_insider_trading.php
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