Decades ago the inside accountants at Royal Dutch Shell would play a game, Ahead of each earnings announcement, those privy to the numbers would make friendly bets on which direction the news would take the company’s shares. In possession of the same inside information, those most familiar with Shell’s health invariably had different opinions about how the markets would react. The players of the game were more often than not wrong.
It’s a reminder that predicting the future is difficult, even when predictions are made with information others lack. As human beings we tend to see things differently, including company earnings. It’s no easy feat to trade on inside information despite what you’re told.
Which brings us to Andrew Ross Sorkin, the rather emotional writer for the New York Times. Sorkin has a problem with federal legislators buying and selling public-company shares. As he sees it, “the credibility of the markets” is compromised by the trading of individual shares by legislators who perhaps at times possess advance knowledge of information that could move share prices. Sorkin is pursuing symptoms as opposed to problems, but we’re getting ahead of ourselves.
For now it will be noted that the self-serious Sorkin reported in his latest column that he’d spent “hours on the phone and on Zoom calls” talking about a solution that “I [“I” being Sorkin] developed that could significantly reduce, if not end completely, questionable stock trading by members of Congress by creating more transparency about trades.”
The idea “developed” by Sorkin, and that Sorkin quoted former SEC chairman Harvey Pitt as viewing to be “clever,” is that the SEC “would require the broker-dealers to set up a special compliance program for clients known as ‘politically-exposed persons’” who would be required “to personally answer a questionnaire every time a trade is executed, irrespective of whether the trade is instigated by them or a financial adviser.” Sorkin wants to make it theoretically impossible for legislators possessing information to trade on it. Where do we begin after it's pointed out that laws and regulations, like prisons and walls, tend to be porous?
The first question is why it took Sorkin “hours on the phone and on Zoom calls” to come up with an idea utterly bereft of originality? No doubt Harvey Pitt referred to it as “clever,” but then Sorkin writes for the New York Times. If he were a columnist at the Teaneck Daily Shopper readers can rest assured that Pitt would never have responded at all. Or if he had, he would have gently patted Sorkin on the proverbial head to alert him to the dated quality of his proposal.
Goodness, investment banks (and surely law firms) have had the same rules call for by Sorkin in place forever. Probably public corporations do too. At Goldman Sachs all employee trades have long had to be cleared by compliance ahead of time, not to mention that all manner of shares can't be traded by employees for their personal accounts at all in consideration of GS’s investment banking and research relationship with them. Basically Sorkin spent hours discussing a “solution” that has long been in existence. That Sorkin’s unoriginal “solution” would be bad for the markets and economy just adds to the wonderment about Sorkin himself. He doesn’t lack for self-regard, nor would one guess he ever needs a hug.
Back to the solution, implicit in what Sorkin spent hours developing is that equity markets would be more credible if those possessing information about the companies traded were barred from transmitting that information to the marketplace. Translated for those a bit slow on the uptake, Sorkin aims to improve markets by blinding them.
Indeed, if he wanted to enhance the credibility of equity markets he would encourage the employees of public corporations, the investment bankers who help finance public corporations, and the politicians most privy to knowledge that will impact the health of public corporations, to actively trade and talk about what they know. Markets are information machines, and the more that they’re informed, the better the prices investors with limited knowledge are getting. In other words, if trust in markets is the goal, let’s inform those same markets as much as possible. More broadly, the economy would gain from the encouragement of “insider” trading. Think about it.
Just as the price movements of goods and services tell producers what consumers like and dislike, so do equity prices provide investors with information about where money will be treated best, and also where it will be treated disdainfully. The better capital is allocated based on quality information, the more the economy hums along.
In Sorkin’s case, his alleged solution would, if effective, blind investors of all stripes to essential knowledge. By extension, Sorkin’s plan would drain equity markets of credibility.
Sorkin would likely reply that it’s not fair for privileged lawmakers to trade on information not immediately available to the public, but what’s much less fair is for an information-deficient public to put hard-earned dollars to work in mutual funds or individual shares that are mis-priced thanks to vague laws meant to discourage with the threat of jail the infusion of crucial information into the stock market. Sorkin’s deep feelings have him pushing a solution that is anti-investor, and also anti-economic growth.
Still, he has a point about depriving frequently odious politicians of any kind of advantage. But even then, Sorkin is - as mentioned previously - focused on symptoms as opposed to the real problem.
The emotive Sorkin doesn’t like the idea of politicians buying or selling based on privileged information, but he misses that they would be able to do neither if the federal government were exponentially smaller owing to its size and scope once again being limited by the Constitution. In short, we would never have to worry about Congressmen and Senators trading on non-public information if both houses of Congress were operating within the very thin swim lanes laid out in our founding document. Sorkin yet again is focused on symptoms as he spends hours deep in thought.
How about he instead focuses on the problem of a federal government that does way too much and spends too much? If politicians were constrained, they wouldn't have privileged information in the first place. Will Sorkin write about that? It wouldn't be a serious bet to place. Which is why there’s little reason to take his overwrought hand-wringing about “insider trading” seriously.
