Congress should be able to inside trade.

If you cannot get away from your hatred of congress than there really is not any point in reading further. This is not about them being able ethical, of course it is not ethical. I will answer any criticism I get in the comments, as long as it is intelligent and you have at least read below.  60 Minutes ran a story about insider trading and it got a lot of tempers flaring.  First let me say that making insider trading illegal is about enforceable as making marijuana illegal. Making insider trading illegal gives everyone a false sense of security, it is a way of outsourcing due diligence.  We know how well that goes.  I am also not going to address the IPO portion because an IPO is like a lottery ticket.  If you are going to make serious money you need a lot of them to make up for the losses and/or if you are exiting on the first day.

I am making a few assumptions about the insider trading congress is doing.  The information they are using is based on how congress is going to vote or take action.  For example, they did not trade on pending bankruptcy news.  The second assumption is that they are a small part of the overall liquidity and their inclusion in the market did not distort prices in a material way.  If I have not correctly assumed those two things I have no argument.

If you do not believe congress should be allowed to inside trade you must believe the following:

There is such thing as a risk free trade. Knowing information before others means that you are guaranteed to make money.  There is never a risk free trade, risk free means that the same people are acting in the same way at the same time. There are always risks in a trade, even if it is only exit risk.

Information is hard to find.  The one thing that I know is that people like to talk.  The information would have to be only known by the congress which I find hard to believe.  I am sure there is a blog out there somewhere that covers this that you probably do not even have to pay for.

Markets always move as expected. You believe that the market always moves in the way it should, that the market always acts rationally, and that everyone digests the information the same way and at the same time.  You believe that all good news causes sustained rallies and bad news causes sustained breaks.  This can happen in illiquid markets but not liquid ones because there are many different reasons and time frames.

That information is the most important thing. Lets say no one knows there is going to be a vote or have no clue how congress will vote.  You believe that this information is the only thing that matters to the price of the stock.  Without a doubt information plays a part but not always a significant part.

So I did not write this post because I wanted to write about politics, I hate politics and I do not think they are doing a good job.  I wrote this as a way to explain a few problems you may be having in trading.

The first is bias.  I will be honest, when I started watching I wanted to hate them and call for their heads.  I still looked at the information.  I got blasted because after looking at the facts because I do not think it is a big deal.  I may have oversimplified the above explanation and please let me know if I did but you cannot logically argue that Congress has an advantage over everyone else.

Second is that there is a short cut.  You know why trading can be so profitable, because it is risky.  If you are trading on inside information you are gambling. You are engaging in an activity that can not be repeated.  People are mad because Congress is “getting rich”, not exactly.

Thirdly, trading is about execution not information.  If I gave you the closing price of the S&P 500 tomorrow would you make money? No. Knowing what the market is going to do is the easiest part of trading. That takes less than a year to learn, learning how to execute takes a lifetime. It takes a lifetime because the market is constantly changing and you must constantly be learning.  I always find it a little funny that people guess the NFP numbers not how the market reacts.

So please debate me in comments.  If I got the assumptions wrong let me know. I realize there are going to be crazies in the comments but here are the rules.  Please tell me what part you disagree with and/or if I did not specify you specify what assumptions/facts you are working with, no citing wikipedia or zero hedge, and if you are going to call me names do it creatively.  I am big fan of fuckstick.

Updated: Interesting link, Rep Bachas made 160K from trading with TARP information. http://bit.ly/rtqAvF This goes to further strengthen my argument that they had little effect on the market.  Once again, I am not arguing ethics.  100% I think it is wrong.

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  • You would have to be a real fuckstick to know with 100% certainty where the market was headed over the next 24 hours and still not make money…..I do get your point though i.e. most people will leverage too much and get stopped out early etc. 

    • Obviously I was using hyperbole.  I still think people would mess it up from time to time.  I have had my fair share of getting in my own way. No stealing my word.  ha ha.

  • If someone knew the end result, why wouldn’t they buy options on futures that require zero margin risk, with a time window of coverage for the incident? In your example it was a closing price the next day.

    However, any asshat with the slightest understand to trends, could use info such as new unlimited printing, to take an extremely leveraged position with out any margin risk what so ever. In fact, why would anyone take a major pit position if they are from DC and used to the time it takes to change a nations laws?

    Its not about their capacity to hold a position, it about their ability to know what WILL happen months from now and being able to profit with out significant risk. I completely agree there is always risk, on both sides of any trade.

    However having a risk based edge, that is the issue in my opinion.

    • My point is how do they know that the information will matter to the market, in the direction they anticipate. If you are trading on information you leave yourself open to massive exit risks. 

  • Anonymous

    You’re missing the point – this has nothing to do with Congress’s effect on markets when they trade – the size they trade in is de minimus.  This has to do with the people that make the laws also profiteering from that activity.  It is not what we sent them there for.  I am not naive as to think we can ever truly stop insider trading or government corruption – but we can very easily separate lawmakers from trading for the period of time they’re in office. 

    • Agree with you 100% but while unethical it is not illegal. Don’t you think information has become commoditized?  What value does it really have?  You still have to execute the trade. Now with the land deals and the campaign contributions that is a bigger problem. 

  • yo

    c’mon eli
    i’m sure you know at least a little about expected value in trading and how having this inside  information increases the expected value dramatically. 
    Onoly talking in terms of ‘is it a risk free trade’ makes it look like you either know nothing about expected value or you are purposely trying to cover for the rent seekers.

    • Ok, give me a piece of news in the past or in the future that is not related to a bankruptcy.  Tell me what price you are getting in and what price you are getting out and what percentage gain along with dates. 

  • Eli, you can be successful and beat the market if you have more information than the market.  Pelosi and Bachus show two examples where they had more information than the market, and made some decent money. 

    As the Hoover guy said, doesn’t matter the size of the trade or account.  Even one dollar made through inside trading is poor ethically.  It’s a slippery slope to a gazillion dollars.

    • You still need to get out of that trade.  Are you telling me that if Goldman comes in the pit and sells 500 that the market is guaranteed to go down?  Trading purely price action does not work over time unless you can scalp it big, which they were not doing.  Having to get things done is always way more important than the information.  I do not think we should assume that the information is that hard to obtain either. 

      This debate was never about ethics, of course ethically it is wrong, but it does very little to change market prices. 

  • Ross

    Data is not on your side. If they have no advantage then they shouldn’t be able to outperform market. However they outperform market by a massive amount (12% annualized). For 500 people to on average outperform market by 12% a year is way outside the realm of what is randomly possible. Clearly they have an advantage.

    • How was that data collected?  I have seen a bunch of different numbers so it means someone isn’t tell the truth or the numbers are getting fudged around.  Just show me a few specific example of a trading strategy based on news would be helpful, including exit price and time.  

      • Ross

        Ha! Cus two different studies covering two different time periods have different levels of out performance there is no out performance? Ok you’re right you win. If your opinion was a position you would have dumped it Sunday night. Be honest:).

  • They were trading on information that would fundamentally change businesses – ie health care bill. there is no exit risk when the stock goes up 80% and you bought 50k of a liquid name 

    • Especially in the last 3 or so years, there is limited edge in news in a course observation.  How many stocks increased by 80%?  No one can seem to produce one example of a specific trade that worked with time and price of entry and exit.  There are more effective ways to trade. 

      • heres an example http://www.businessinsider.com/congress-insider-trading-john-kerry-obamacare-health-care-reform-2011-11?utm_source=alerts&nr_email_referer=1

16 Responses to Congress should be able to inside trade.

  1. Robert Sinn says:

    You would have to be a real fuckstick to know with 100% certainty where the market was headed over the next 24 hours and still not make money…..I do get your point though i.e. most people will leverage too much and get stopped out early etc. 

    • Eradke says:

      Obviously I was using hyperbole.  I still think people would mess it up from time to time.  I have had my fair share of getting in my own way. No stealing my word.  ha ha.

  2. If someone knew the end result, why wouldn’t they buy options on futures that require zero margin risk, with a time window of coverage for the incident? In your example it was a closing price the next day.

    However, any asshat with the slightest understand to trends, could use info such as new unlimited printing, to take an extremely leveraged position with out any margin risk what so ever. In fact, why would anyone take a major pit position if they are from DC and used to the time it takes to change a nations laws?

    Its not about their capacity to hold a position, it about their ability to know what WILL happen months from now and being able to profit with out significant risk. I completely agree there is always risk, on both sides of any trade.

    However having a risk based edge, that is the issue in my opinion.

    • Eradke says:

      My point is how do they know that the information will matter to the market, in the direction they anticipate. If you are trading on information you leave yourself open to massive exit risks. 

  3. Anonymous says:

    You’re missing the point – this has nothing to do with Congress’s effect on markets when they trade – the size they trade in is de minimus.  This has to do with the people that make the laws also profiteering from that activity.  It is not what we sent them there for.  I am not naive as to think we can ever truly stop insider trading or government corruption – but we can very easily separate lawmakers from trading for the period of time they’re in office. 

    • Eradke says:

      Agree with you 100% but while unethical it is not illegal. Don’t you think information has become commoditized?  What value does it really have?  You still have to execute the trade. Now with the land deals and the campaign contributions that is a bigger problem. 

  4. yo says:

    c’mon eli
    i’m sure you know at least a little about expected value in trading and how having this inside  information increases the expected value dramatically. 
    Onoly talking in terms of ‘is it a risk free trade’ makes it look like you either know nothing about expected value or you are purposely trying to cover for the rent seekers.

    • Eradke says:

      Ok, give me a piece of news in the past or in the future that is not related to a bankruptcy.  Tell me what price you are getting in and what price you are getting out and what percentage gain along with dates. 

  5. Eli, you can be successful and beat the market if you have more information than the market.  Pelosi and Bachus show two examples where they had more information than the market, and made some decent money. 

    As the Hoover guy said, doesn’t matter the size of the trade or account.  Even one dollar made through inside trading is poor ethically.  It’s a slippery slope to a gazillion dollars.

    • Eradke says:

      You still need to get out of that trade.  Are you telling me that if Goldman comes in the pit and sells 500 that the market is guaranteed to go down?  Trading purely price action does not work over time unless you can scalp it big, which they were not doing.  Having to get things done is always way more important than the information.  I do not think we should assume that the information is that hard to obtain either. 

      This debate was never about ethics, of course ethically it is wrong, but it does very little to change market prices. 

  6. Ross says:

    Data is not on your side. If they have no advantage then they shouldn’t be able to outperform market. However they outperform market by a massive amount (12% annualized). For 500 people to on average outperform market by 12% a year is way outside the realm of what is randomly possible. Clearly they have an advantage.

    • Eradke says:

      How was that data collected?  I have seen a bunch of different numbers so it means someone isn’t tell the truth or the numbers are getting fudged around.  Just show me a few specific example of a trading strategy based on news would be helpful, including exit price and time.  

      • Ross says:

        Ha! Cus two different studies covering two different time periods have different levels of out performance there is no out performance? Ok you’re right you win. If your opinion was a position you would have dumped it Sunday night. Be honest:).

  7. Tarhini_smb says:

    They were trading on information that would fundamentally change businesses – ie health care bill. there is no exit risk when the stock goes up 80% and you bought 50k of a liquid name 

    • Eradke says:

      Especially in the last 3 or so years, there is limited edge in news in a course observation.  How many stocks increased by 80%?  No one can seem to produce one example of a specific trade that worked with time and price of entry and exit.  There are more effective ways to trade. 

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