Insider trading escalates at hedge funds, reflecting weak controls


As another portfolio manager for SAC is lead away in handcuffs, the hedge fund industry remains vulnerable to insider trading. And while regulators are actively pursuing these lawbreakers - there seems to be a new insider trading headline every other week - the industry must do more to manage this issue.

Sadly, few experts know what to do. As reported on Advanced Trading, so-called "insider information" is difficult to define especially when ambitious fund managers need info to execute trades and manage their rich portfolios.

"The infrastructure of insider trading industry is of course, by design, opaque, since it deals in an illegal substance called inside information. One can't be overly simplistic about this. Unlike drugs, for example, there is some level of ambiguity that makes going after its traffickers somewhat tricky: first, what exactly constitutes 'material non-public information' (mnpi); second, how to determine who is in possession of such information and, third;how to identify those who are trading on it with the requisite intent to do so. However, prosecutors have had considerable success in overcoming these obstacles in recent years as they have adopted more aggressive methods. Much of this success has been focused on two types of financial service firms: expert networks, firms who provide consulting advice to trading firms, and hedge funds.

The middlemen in the insider trading industry are the expert networks who can (sometimes unknowingly) link the users (traders) to the suppliers (industry executives, researchers - people with access to inside information). The operation is financed by the users who are willing to pay good rates for the information."

This is the definition of irony. We live in the so-called "Information Age", but now regulators want to know how you know what you know.

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