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NewsNotables – Issue 80

Senate Passes Ban On Insider Trading

The Wall Street Journal, February 3, 2012

After years of delay, Congress took a big step toward approving new rules to ban lawmakers from trading stocks based on information they pick up in the halls of Capitol Hill. The Senate voted overwhelmingly to pass the legislation called Stop Trading On Congressional Knowledge Act.

The Wall Street Journal examined thousands of records of congressional trades using federal financial reports and found that more than 50 members of Congress traded actively. Many bought and sold stock in companies as Congress debated legislation that could affect the firms. Few appeared to make much money on the trades and many suffered losses. The Senate bill would prohibit members of Congress and their aides from making stock trades based on information they learn on Capitol Hill. The bill would also require public officials to disclose their financial transactions within 30 days.

The bill also requires so-called political intelligence practitioners to disclose their activities for the first time. The political intelligence industry comprises hundreds of lobbyists, former congressional aides and others who scour Washington for market moving tips about pending government activities that could affect stock prices. These political intelligence purveyors are paid by hedge funds and other Wall Street firms to gather information about pending changes in public policy the investors can use to make trades.

Before approving the bill, the Senate added provisions that require members of Congress to make public the full value of their home mortgages, prohibit senior executives at Freddie Mac and Fannie Mae from receiving bonuses while the companies remain under federal control, and ban former members of Congress from receiving government pensions if they are convicted of a felony.

An amendment extended the trading ban and disclosure requirements to the President, Vice President and high level executive staff, Federal Reserve Board members and other senior officials.

Comment: There has been much debate on this bill. Many legal experts say that traditional insider trading rules don’t apply on Capitol Hill because lawmakers don’t have a legal duty not to act on market-moving information. It’s appalling to me that our government has enforced insider trading rules on the general public but not on itself. This bill is long overdue.

SEC May Ticket Speeding Traders

The Wall Street Journal, February 23, 2012

The SEC is looking to curb high frequency traders’ huge influence on stock trading and is considering charging fees for the myriad buy and sell orders that are later canceled, among other options. SEC Chairman Mary Schapiro said a large portion of equities trading has little do with “the fundamentals of the company that’s being traded.” She said it had more to do with “the minuscule aberrational price move” that computer-assisted traders with direct connections to the exchange can “jump on” in fractions of a second.

One remedy being considered would be to force high frequency traders to pay for the canceled trades that make up nine tenths of all orders. Another possible remedy would be to require such traders to maintain competitive buy and sell orders in the market throughout most of the trading day. High frequency trading firms move in and out of stocks rapidly using powerful computers. Ms Schapira said some of her concerns were sparked by the May 6, 2010, “flash crash,” when the Dow Jones Industrial Average plunged several hundred points in a matter of minutes before recovering much of the lost ground. A SEC report after the crash found that many high frequency firms stopped trading during the upheaval, and some placed added pressure on the market by selling their positions.

Many retail investors sat on the sidelines for months after the crash until they understood what happened that day (May 6, 2010). For that reason, among others, the crash posed a challenge to the SEC’s stated mission, which is to “maintain fair, orderly and efficient markets” and to “facilitate capital formation.”

Ms. Schapiro said the SEC already has implemented a number of fixes since the flash crash, including circuit breakers that will pause trading in a stock that has made a large move in a short period of time. The SEC has also banned so-called stub quotes, in which a trader can offer to buy or sell a stock for a price far away from what most investors are willing to pay-a factor that caused many stocks to plunge temporarily to as little as a penny, or to soar to nearly $100,000, during the crash.

Comment: An estimated 95–98 percent of orders submitted by high-frequency traders are canceled as the firms rapidly react to shifts in prices across the stock market. This obviously can have a negative effect on retail traders and strain the ability of the stock market to maintain fair, orderly, and efficient markets. I commend Ms. Schapiro’s efforts to restore soundness the stock market.

By Roger Eigsti
Board President,
Institute for Business, Technology, and Ethics

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