A week or so ago I argued with Herb on CNBC that a little insider trading is an acceptable price for keeping insider trading payoffs down, and reducing the cost of market oversight. He disagreed, but I was still right. (And now I’m sure he’ll disagree even more strenuously.)
Anyway, another side of this overdone insider trading issue is that it is actually much harder to do well than it looks. Case in point: A release today from the SEC highlighting how it caught an Oracle vice president in the deed, who had been receiving “tips” from his wife, an executive assistant to Larry Ellison.
But there is a twist. The guy made some money based on insider trading, but not that much. Despite, for example, knowing about the Oracle/Siebel deal in advance, and despite investing almost $500k based on his inside info, he only made $82k. Granted, that’s non-zero, and it’s still illegal, but the thing that intrigues me is that insider trading is made out to be this sure-fire path to riches, and, as this example shows, it’s much harder to make big money at it than how naive observers characterize it.
[Update] Two points to make my argument clearer.
- It is easy to make money buying expiring out of the money options the day before a deal is announced. It’s just hard to keep that money after the SEC show up at your house a few weeks later.
- Far more inside info than we all like to think turns out to be valueless. Maybe the market knew about the deal, maybe the market didn’t like the deal, maybe the product was a bomb, maybe some other news intervened, maybe the deal fell apart, etc. There is only one way to make money on inside info — the markets thinks the news is as important as you do — and there are lots of ways to lose money on inside info.