Interesting bit from Slate (via Business
Insider) from last week tracing
the shockingly good record of Securities and Exchange
Commission (SEC) employees when it comes to making trades at the
right time in stocks of companies the SEC investigates.
Turns out reseachers found “SEC employees tend to sell a
company’s stock before the SEC takes enforcement action against the
company” leading to:
abnormal returns of about 4 percent for the market in general,
and about 8.5 percent for the U.S. stock market. That’s
significant….60 days before an enforcement action, when the
market is selling at a rate of about 50 percent, SEC employees are
selling at a rate of 71 percent. The SEC employee rate of sales
increases as the enforcement action approaches, while the wider
market’s pretty much stays the same.
Nothing wrong with this though, says the SEC. It’s a
feature, not a bug, of working for them:
Before an employee works on a case, they must divest
themselves from any interest in the company. So it makes sense that
employees sell their stock in a company before enforcement action.
It just happens to also be profitable.
I am not implying that SEC employees should face legal sanction
for their trading on very material information that only they are
in a position to know. It’s a fact that every trader (and
every non-trader) may in the nature of reality of life
on Earth know things that other people don’t or can’t easily know,
and in fact markets couldn’t work without this fact. They work most
efficiently when those who know true things that might affect value
get to act on and have market prices reflect that knowledge.
It just should make you wonder about any criminal action based
on one’s choices about when to buy or sell (or not buy or not
sell!) stocks.
I have written in the past about the
weird crime of insider trading, and Michael McMenamin wrote for
us in 2003 a feature on “St.
Martha” when Martha Stewart was bedeviled by those laws.
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