Editor’s note: This article was first published in August 2010. This is news from that month, and the case is not identified in the original. The events described were current then.
A broker working for Banco Santander and another Spaniard have been charged by the US securities regulator (the SEC) with using insider information to make profits of around €873,000 in just four days. Now, personally, this opens up a debate for me.
It’s not the first case in the United States, and the first cases of people accused of using insider information are already cropping up on the Spanish stock exchange. When we read these stories, many people won’t hesitate to say something like “What a disgrace,” but we ought to start looking at what actually counts as “insider information.”
The stock market has been about speculation since the very beginning. Nobody would invest without speculating that a stock might rise in value for one reason or another. Now, suppose I’m a broker and I mix with the director of a company who, over coffee, tells me they plan to merge with another company and talks me through their plans and future projects.
As a broker or investor, I can analyze that information and conclude that investors will like those plans, causing a significant rise in the share price. Does that mean that if I invest and make tens of thousands of dollars, I’ve used insider information? Should I sit still and not invest because I know something few people know?
It would be different to deliberately start a rumor to drive a stock’s price down, buy it and then sell it. But now anyone who makes large profits in the short term will be investigated by the CNMV (Comisión Nacional del Mercado de Valores, Spain’s securities regulator).
Smart investors analyze information, some of it general and some of it more “privileged”; otherwise they wouldn’t invest the kinds of sums they put into the stock market.
If things carry on like this, investing in the stock market may stop being profitable in a few years, because it will start working like a casino: if you lose, welcome, come back any time; if you win, let’s see where you cheated.
A good broker’s job isn’t to get an investor to invest blindly. Rather, a good broker should gather information in order to advise the investor. We are now walking a very fine line, where genuine brokers will be on the edge of illegality whenever their investments bring high short-term profits.
Further reading
- Common mistakes investors make
- Serious mistakes investors make
- How to invest in the US stock market
- What Arthur Rock looks at before investing
Featured image: Ank Kumar, CC BY-SA 4.0, via Wikimedia Commons.
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