The inevitability of insider trading

After presenting many obvious advantages Wall Street and Greenwich, CT trading firms have over ordinary investors and day-traders (e.g., sophisticated computers and computer models), Henry Blodget explains the impossibility of stopping all insider trading:

There is simply no way to police facial expressions and body language. When you’re at a cocktail party with your buddy who knows what is going on inside a particular company, you don’t have to be a mind-reader to get a good sense of it yourself.

The buddy doesn’t need to tell you anything specific. The buddy doesn’t need to pass you secret confidential documents. The buddy doesn’t need to give you hand signals. All the buddy has to do is look at you in a certain way. To paraphrase the old saying, a facial impression is worth 1000 words (and it also has the convenient feature of not being persuasive evidence in court).

Facial expressions don’t have to just come from buddies, of course. When you’re meeting one-on-one with a CEO, you can learn more from the way a CEO responds to a startling question than you can from a thousand page SEC filing. And no one will ever complain that you’ve been given material non-public information—even though that’s just what you’ve been given.

Posted by James on Thursday, April 15, 2010