February 25, 2007 – Here is a story that was running in the U.S. markets last week out of San Francisco:
“The Securities and Exchange Commission has begun a broad investigation into whether Wall Street bank employees are leaking information about big trades to favored clients, such as hedge funds, in an effort to curry favor and has requested a wide range of information from at least four major banks” including Merrill Lynch, UBS, Deutsche Bank and JP Morgan. The SEC sought records regarding all stock and option trading data for themselves and their customers for the last two weeks of September. Basically the SEC said that they wanted to discover the extent of “front running” that exists, the act of insiders buying or selling stocks and options ahead of major large volume institutional purchases or sales that virtually guarantees profits.
Without knowing the results of this investigation, I can already tell you the answer to this question, regardless of what the SEC will finally report. It happens, and it happens on a widespread basis. If the SEC really wanted to be thorough in their investigation, they would also investigate all the “front running” activity that powerful politicians obviously engage in and the loose collusion that likely exists among the major Wall Street institutions when their “coincidental” purchases and sales of the same blue chip stocks constitute such a high percentage of the float that they actually move the markets for these stocks.
Insider trading has always existed at the highest levels of what I call the three-headed despot— Government, Banking, and Corporations — and it will never stop. I have always maintained that the most powerful persons in the world are not legislators, but bankers. Bankers pay the legislators’ paychecks so given that the whole checks and balances system of almost every governments is a mere faÃ§ade that truly does no longer exists, every time the legislators come down too hard on the bankers, the bankers will tighten the leashes that they hold around the legislators’ throats until they back off.
Inexplicable actions happen all the time in the market and it is highly likely that many of the ones that turn enormous profits for large global institutions are a result of front running. For example, during the past couple of decades, almost all of the major global bullion banks had enormous bets placed in gold derivatives at one time or another, from which astronomical profits were made. Interestingly enough, if one studies the behavior of these institutions, some in particular refrained from making any bets in gold derivatives until very high ranking members of the U.S. Department of Treasury left the government to join their company’s executive boards. The level of other institutional bets in gold derivatives seemed to be directly correlated to the strength of political connections these corporations had with the U.S. Treasury. The greater their connections, the greater their bets.
Front running happens in so many different areas of the global markets that besides it is just too widespread for any regulatory agency to entirely abolish. In addition, the people that engage in front running are some of the wealthiest individuals and institutions in the world, with way too many resources at their disposal to crush such investigations. So in the end, can the average investor benefit from all this front running in an absolutely legal manner? Most definitely yes. The key is to follow the trails of money. Because the information world has flattened, finding the trails of money has become 100 times easier than it was even a decade ago. If you can find instances where enormous investments are being made in corporations without any significant news on the frontline, you can be assured that some front running is occurring and you can piggyback along for the ride up. In the past six to nine months alone, I’ve used this strategy to gain triple digit returns several times in mid-cap to large-cap companies that were far removed from the volatile nature of micro cap companies that most investors believe are necessary to attain triple digit gains. Keep this in mind and it’s not only the most powerful people in the world that can benefit from front running. They do it illegally but for the average investor, it’s possible to do it legally.
[tags] Merrill Lynch, UBS, Deutsche Bank, JP Morgan,insider trading,investment strategies,frontrunning[/tags]
J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.