The important thing for investors is putting a dollar figure on the gains realized by insiders at their expense. The stale best offer of $17.74 per share that SIP subscribers saw during the six-second delay occurred while bid quotes on various exchanges quickly passed the $17.74 mark. SIP subscribers did not know this. Insiders did. With advance notice of the rising quotes, insiders would have bought shares at $17.74 from SIP subscribers when the insiders knew that there were higher bids at which the subscriber could have sold their shares.
Investors are routinely fleeced when insiders receive advance notice of trading data that enables them, for example, to trade at the stale NBBO when they know that a higher bid or lower offer is on its way. Insiders profit even when the NBBO is stale by only a few milliseconds, which is typical, because they can act on trades in fractions of those milliseconds.
The exchanges will not disclose, of course, which investors had their pockets picked in the middle of the afternoon on Dec. 20, 2013, but we know who they might have been: Mutual funds, pension funds, companies repurchasing their shares, company executives selling shares and individual investors are all likely candidates.
Only the exchanges—the architects that are paid for creating and maintaining the insider trading scheme's structure—can tell us who absconded with the various Activision stock sellers' money.
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Michael Lewis has said of high-frequency trading that "[i]f it wasn't so complicated, it would be illegal." Some HFT practices are illegal, so it might be more accurate to say that "if it wasn't so complicated, it would be prosecuted." First, the exchanges have a viselike grip on the data, a position that HFT lawyers stand ready to (confidentially) defend. Federal prosecutors will have great difficulty bringing cases without access to data and the assistance of the exchanges to analyze it.
Second, regulators may be reluctant to prosecute predatory HFTs. These practices have been going on for years, but the financial crisis may have put market manipulation on the back burner. The kinds of market abuses in which some HFTs engage are very similar to those alleged in a series of cases against NYSE specialists that resulted in a record string of losses for federal prosecutors, which may have left them chastened.
Critics of HFTs lack confidence in the SEC. They believe the SEC incorrectly blamed the flash crash of 2010 on a mutual fund firm (ironically, mutual fund firms are the largest victims HFT-related abuses). To be fair, the SEC report places much of the blame on HFTs. In contrast, the CME self-servingly found that HFTs "may have had the effect of providing a buoyant function in the market." Critics also note that the SEC hired an HFT firm to create its Market Information Data Analytics System (MIDAS), which one Congressional witness described as the "fox guarding the henhouse."
Critics complain that Gregg Berman, head of the SEC's Office of Analytics and Research, previously worked with hedge funds and HFTs. My reading of Berman's statements suggests a strong emphasis on efficiency that may reflect—with the emphasis on may—a non-lawyer's view of the legality of insider trading. It would help clear up any doubts regarding his position if he (or better, SEC Chair Mary Jo White) made an explicit public statement in support of the SEC's own NYSE enforcement action and confirmed the fundamental illegality of the exchanges' selling advance access to material, nonpublic trading data to insiders.
Bullard, a former SEC official, has testified before Congress on securities regulation issues on more than 20 occasions. He is an MDLA Distinguished Lecturer, Associate Professor of Law and Director of the Business Law Institute at the University of Mississippi School of Law; founder and president of investor advocacy group Fund Democracy; and vice president at financial planning firm Plancorp. The graphic in this article was provided by Eric Hunsader, founder and CEO of Nanex.