Insider Trading Inc: Beat The Market, Work For The SEC

Tyler Durden's picture

It’s often said in financial markets that correlation does not mean causation. On some occasions, however, denying the causation seems so outlandish to be, frankly, preposterous. As a case in point, Institutional Investor (II) discovered a newly published academic work investigating the investment returns of SEC employees. It turns out those guys are surprisingly good.

According to II, employees at the Securities and Exchange Commission may benefit from divesting companies ahead of investigations, research shows.

Employees at the U.S. Securities and Exchange Commission earn investment returns similar to the insider traders they prosecute, according to new research from Columbia University and Arizona State University.

Why aren’t we surprised. No matter, II continues...

A portfolio mimicking trades made by SEC employees between 2009 and 2011 earned excess risk-adjusted returns of about 4 percent a year for all securities, with abnormal gains jumping to 8.5 percent when only stocks of firms based and registered in the U.S. were tracked, found Shivaram Rajgopal, a professor of accounting and auditing at Columbia’s business school, and Roger White, an assistant professor at Arizona State University’s W.P. Carey School of Accountancy, in a paper published this month.

 

Rajgopal and White said the excess returns seemed to be primarily due to employees selling stocks ahead of bad news revelations. SEC employees, they explained, are required to divest their holdings in companies they are assigned to investigate.

 

“We are concerned that such a policy is tantamount to forcing employees to sell stock on non-public information given that virtually all investigations initiated by the SEC are private,” the authors wrote…

 

By comparison, a portfolio mimicking U.S. corporate insider trades earns lower risk-adjusted abnormal returns of about 6 percent a year, according to the research paper.

Hold on a minute…let’s recap.

SEC employees do twice as well by trading domestic stocks that happen to be located in their jurisdiction and the main source of these gains results from employees being forced to sell stocks they are investigating.

Firstly, we doubt there’s much “forcing” occurring. In fact, we’d love to be privy to some of the conversations around the inverse Chinese Walls water coolers at the SEC.

 

Secondly, are we meant to believe that, in general, individual SEC employees are running portfolios where performance benefits significantly from selling long positions in companies that, by a strange quirk of fate, they subsequently find themselves investigating?

 

Thirdly, when the report discusses selling, does that include shorting?

When II called, the SEC press department, the latter “didn’t immediately provide comment”. Probably nothing. Anyway, back to the report and II remarks on the difference in performance between buy and sell trades put on by the SEC’s trading gurus.

The study was based on trading data for 3,500 SEC employees provided by the regulator to the authors under a Freedom of Information Act request. Although these employees earned abnormal returns from selling stocks, Rajgopal and White said they “seem no different from naïve individual investors in terms of the securities they pick to buy” — suggesting excess returns were not the result of investment skill. “If SEC employees are simply good stock pickers, given their background and experience, we would expect to observe abnormal returns on their buys as well,” they wrote in the paper.

“Naïve” is something we suspect these people are not. But what do these seeming correlations mean? II comments on Shivaram and White’s conclusions.

Though Rajgopal and White acknowledge there is not sufficient evidence to conclude that abnormal returns are the result of SEC employees trading on non-public information, they argued that the current trading policy for employees should be reassessed. “Even an appearance of financial impropriety potentially undermines the credibility of the SEC with its stakeholders,” they wrote, suggesting that the issues they highlighted could be solved by prohibiting employees from trading in individual stocks. “While potentially draconian, such a policy is the simplest way to abrogate the concerns of even the most cynical observer,” they said.

So, there you have it, insufficient evidence of causation.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Dead Canary's picture

I have an new name for the news Disinfotainment.

Shitonya Serfs's picture

The profs should do a study on how much side-money these SEC employees make feeding these messages to "real traders"...probably do much better on their side-hustles.

pods's picture

Blue Horseshoe (SEC) loves Anacott Steel.

Skeptophrenic's picture

The simple and easy solution would be to limit employee investments to those made on a discretionary basis (by an investment manager) or via ETF Funds.

The fact that this is not the case is absurd.

Automatic Choke's picture

(in my best Gomer Pyle voice).....

   "Surprise, surprise, surprise !!!"

 

nope-1004's picture

Obama sponsors a yacht full of dope coming into FLA and behavior like this is surprising?

The entire system is corrupt from the top-down.  Thankfully, corruption to this degree has only one outcome, and that is complete failure.

 

IH8OBAMA's picture

The SEC employees have nothing over Congressmen and their aids.  Those people REALLY clean up on securities investments and are above being prosecuted for insider trading. 

 

Mike Masr's picture

I wonder if CFTC employees are trading futures markets and also making a killing?

Overleveraged_and_Impatient's picture

I work for the SEC. That's why I am fully levered 3x Long S&P 500 and doing handsomely this year.

buzzsaw99's picture

with that edge alone they'd be fools to not own as many individual names as possible.

buzzsaw99's picture

i'd be willing to bet that every single one of those fucks owns GS one way or another.  the squid does not lose.

ali-ali-al-qomfri's picture

We need to act criminal so we know what to look for,

for we have seen the enemy.............

 

aliens is here's picture

They are all scums in DC everyone of them.

LawsofPhysics's picture

Yes, it is in fact a "club", so fucking what? What are you going to do about it peasant?

"Full Faith and Credit"

A. Boaty's picture

Corrupt regulators? Say it ain't so! I feel so disillusioned! (sob)

warpigs's picture

Gotta be in it to win it! What fucking corrupt assholes. It never ends...

hooligan2009's picture

easy fix for the SEC

QUARANTINE the shares that will be subject to investigation, rather than force their sale.

in this way, there is no conflict and SEC employees will only invest in companies that are NOT LIKELY to require investigation.

the most telling comment here is that there is no evidence of upside in returns from purhcases of securities in the US.

the other thing the SEC can do (if it does not so already?) is to pulbicly announce the start date of both CONSIDERING an invstigation as well as the start of the ACTUAL investigation.

that way the regulator has the same information as the market.

Solio's picture

Shouldn't the headline read "How to Beat The People"?

 

The children are at risk.

surf@jm's picture

LOL!.......

Well, if its good for congress, its good for the SEC employee.......

Better call Mueller.......unless their democrats, then forget about it.......

adolphz's picture

only insiders will know when the crash will come.  They are all setting up the commoners to be used for max pain. That is why Shepwave has been getting markets correct.  I am convinced that they part of insiders. I am not complaining for now since I am making money but  questioning is when they will become selfish greedy like the rest.

Kendle C's picture

I wonder how many of these guys got a new roof, a Tesla, or a Rolex for inside information; perhaps a fungible substitute? These SEC turds are exactly like our CONgress and Senators who granted themselves the right to trade on inside information. One makes the laws, the other breaks the laws: they're all dirtier than a Tijuana bus station bathroom. When will we start the trials? Anyone? SEC are the equivalent of financial police. Oh wait the police are taking your RV because there was a joint in the ashtray. Jeepers, could the whole God awful Rube Goldberg machine be breaking down?

 

The other day that Dershowitz was saying collusion is not, of itself, a crime. He's their fucking spokesmodel. Perhaps the better question: what ISN'T corrupt, rotten, and crooked? Anything?

Synoia's picture

Nah, the SEC Employees/yesmen are just lucky.

Just as lucky as Hillary with her 1978 commodity trades, where she lucked out with the best position multiple times in a row, becuse Bill's an expert on best positions.