Insider trading

“ Insider trading, stock manipulation, monopolies, hoarding - all tend to consistently but unpredictably distort price signals and, thus, deter market participation.
Market players take for granted the existence and continuous operation of institutions - financial intermediaries, law enforcement agencies, courts. It is important to note that market players prefer continuity and certainty to evolution, however gradual and ultimately beneficial. A venal bureaucrat is a known quantity and can be tackled effectively. ”

“ Groups of Stock-Exchange members each day appear to buy from other groups great quantities of shares of different stocks at advancing prices. In reality all the brokers—the ones appearing to buy and those who sell to them—are in league with each other, and none of the transactions is actual. The performance bears the same relation to legitimate Stock-Exchange trading that the purchase and sale of a gold brick among confederates at a circus do to the genuine work of the gamblers and pick-pockets who are really attending to business around them. ”

“ From which it may be observed that in stock speculation, as in other pursuits, wisdom and the ability to master one’s own impulses are sometimes late in arriving at full maturity. Indeed a broker who for upwards of thirty years has held a position of outstanding prominence on the floor of the New York Stock Exchange—a man who often handles a hundred thousand shares or more in a single day—once admitted to me that while he generally made money for clients who entrusted him with optional orders, yet he regularly lost more than half his enormous commissions trading on his own account. ”

“ Congress recognized that insiders may have access to information about their corporations not available to the rest of the investing public. By trading on this information, these persons could reap profits at the expense of less well informed investors. ”

“ People desire the profits of trade, but are unwilling to lose caste by engaging in it openly. In order to fill their pockets and preserve their rank at the same time they engage in business anonymously, either as members of some firm in which their names do not appear, or else as share-holders in great trading enterprises. In both these cases the investor of capital becomes just as really and truly a tradesman as if he kept a shop, but if you were to tell him that he was a tradesman he would probably resent the imputation. ”

“ The great evil of speculation consists in the buying of securities or real estate or anything else with borrowed money, by uninformed people who cannot afford to lose. Its commonest form in speculation in securities is what is known as “margin” trading, this name being derived from the fact that the buyer, instead of paying cash in full for his purchase, deposits only a fractional amount of its cost, which is intended to serve as a margin to protect the broker from loss, while the broker pays the remaining sum necessary to complete the actual purchase. ”

“ These firms it is claimed will be able to evade the Act and take advantage of the 'inside' information available to their members as insiders of countless corporations merely by trading 'inside' information among the various partners. ”

“ It is a fact, moreover, not generally known perhaps, that most of the men whose names are associated in the popular mind with gigantic speculations, and who are credited with deep-laid schemes for taking in the innocent and unsophisticated lamb, are not members of the Stock Exchange, but carry on their operations through members who are generally ignorant and innocent of the designs of the parties from whom the orders come to buy or sell, these orders often passing through several hands before reaching the broker who executes them. ”

“ Every few days there’s a rumor on the Stock Exchange that we are busted, as so many other railroads are, and then the speculators, as I told you, create so much uproar and confusion that no legitimate buyer can find a legitimate seller, but all must do business with the speculator, who plays upon their emotions in the primitive manner by means of terrifying sounds and horrible grimaces. ”

“ This habit has received a great stimulus from the latest attempts at company law reform, in virtue of which the liability of directors for statements in prospectus has been sensibly increased. To escape that risk, new companies are now launched without preliminary statements of any sort. Certain members of the Stock Exchange, acting in concert with the schemers outside by whom they are employed, begin to buy and sell shares in an undertaking whose very name may be until that moment unknown everywhere, and about which neither market nor public has any information whatever. ”

“ Few financial writers dare to tell the whole truth—even on the rare occasions when they are able to learn it. Most of them are, indeed, subsidized to suppress the truth and to accelerate public opinion in the channels that mean money in the pockets of the securities sellers. As for the literature of stock brokers it is generally even more misleading. Few brokers ever dare to tell the whole truth for fear of embittering the interests and being hounded into bankruptcy and worse.
As for myself, what excuse have I had for catering to the gambling instinct? ”

“ Now that we have reached a point in our discussion that brings us face to face with the so-called “evils” of speculation on the Stock Exchange, let us pause and consider the difference between speculation, which is held by many to be abhorrent, and investment, which is generally thought right and proper. The first thing we encounter is the shadowy and indistinct boundary line that separates the one from the other. ”

“ But then, one can't blame the public when you realize how thoroughly unreliable is most of the market information given to them.
Still another kind of manipulation is "one-man" manipulation, where one man controls companies, which are known as "one-man" companies. Usually the directors of these companies are friends or employees of his, and in many instances he has their resignations in his possession, so that they must do whatever he wants them to do. Owing to the strict rules of the New York Stock Exchange, it is rather difficult for such manipulations to be carried on there. ”

“ So far as the trading principle is involved, the joint stock company is no better than the private speculator. However disinterested may have been the motives which have induced some to become shareholders in these companies, and I have been assured upon authority which I respect, that many have done so without any expectation or hope of profit upon their shares, yet the primary and effective character of these associations is undeniably that of trading associations, and they cannot be rescued from that character by even numerous individual exceptions. ”

“ It is so whether the purchases or sales are by investors or speculators, for speculation on the Stock Exchange is not gambling. Whether stocks, or bonds, are bought, or sold, by investors or speculators is immaterial between the contracting brokers on the floor of the Exchange. They know no difference whatever. Delivery of the stocks or bonds is made by the one, and received by the other, in every case, and payments made accordingly, at the sale and purchase prices, investment and speculative transactions being treated exactly alike. ”

“ It is possible that the jobber would rather have bought, but once having made the price, he must, of course, carry out the transaction. When the broker confronts him, he may say he is only a buyer or only a seller of Midland Deferred, but of course, in refusing to deal either way he risks losing the order. Or he may make a price so wide, especially in a stock in which there is not a free market, as to protect himself amply. ”

“ If the news is bad and is likely to injure the interests of our best friends, tell it in the interests of the investor. If it is good and the backers of the stock affected happen to be our worst enemies, tell it. No matter on what side of the market you think B. H. Scheftels & Company is committed in any of its own speculations, give the customer all the news. Put the cause of the mining-stock trader in front of you as the one to further always. ”

“ To complete the purchase he advances from his own funds, for the benefit of the customer, 90 per cent of the purchase money. Quite as clearly he does not, in this, act as an agent, but assumes a new position. He also holds or carries the stock for the benefit of the purchaser until a sale is made by the order of the purchaser or upon his own action. In thus holding or carring he stands also upon a different ground from that of a broker or agent whose office is simply to buy and sell. To advance money for the purchase, and to hold and carry stocks, is not the act of a broker as such. ”

“ There have been instances of gross and unjustifiable manipulation of securities, as in the case of American Ice stock. While we have been unable to discover any complete remedy short of abolishing the Stock Exchange itself, we are convinced that the Exchange can prevent the worst forms of this evil by exercising its influence and authority over the members to prevent them. When continued manipulation exists it is patent to experienced observers. ”

“ Third, we are concerned that some investors could take advantage of the crisis to illegally manipulate the stock market. So the Securities and Exchange Commission is launching rigorous enforcement actions to detect fraud and manipulation in the market. ”

“ Every transaction in the stock market, whether it be in Government stock, or in railway shares, or in any other securities, must be effected through the medium of a broker, who is thus not only an adviser but an indispensable agent in the transaction. Be sure to employ a broker of good standing, and, having found a trustworthy man, be rather guided by his advice than by your own notions as to what purchases are safe and what imprudent.
All documents connected with investments should be carefully preserved, and dividends, when they fall due, should be looked after. ”

“ It is the natural balance wheel of commerce and finance. By its means and through the conflict of opinion between buyers and sellers real values are established by simpler and more reliable means than by any other known methods. No Government investigation will ever ascertain the real value of our railroads so well as the higgling and bargaining between buyers and sellers, which is alike the moving spirit of commerce and the arbiter of values on all Stock Exchanges the world over. Speculation is liable to be carried to excess, and abuses in speculative methods undoubtedly exist ”

“ These constitute the important intermediary which transforms stock exchange securities into the basis of bank-loans. The commercial banker buys, in general, not the stocks, but the note of the private banker, broker, speculator, or investor, with the stocks as collateral. If investment bankers, speculators and investors decide to support old ways of doing things, the banks lend on the securities of the old kinds of businesses; if investment bankers, speculators and investors turn to new things, the commercial banks follow suit. ”

“ The establishment of joint-stock companies for financial and commercial enterprises—an innovation which dates from about fifty years ago—has done a great deal to weaken the sentiment of responsibility.... If certain companies are honestly administered, a great number are made the occasion of shameless frauds. We see audacious speculators buying up a majority of the stock in order to make secret issues of new shares. ”

“ Such has been the growth, indeed, of speculation that several joint stock companies have been formed, which are nothing more nor less than syndicates of speculators who have invited the public to join them in buying up a number of securities and making a profit by selling them at enhanced values. ”

“ You, having control, can depress the stock artificially by rumors of all kinds. As a last resort you can amalgamate with another company, forming a new one, and assess the holders out of their boots. Part of them will forfeit rather than pay the assessments. ”

“ Beyond that it cannot go; and buyers and sellers alike, as in all matters of business, are expected to exercise their own intelligence as to the merits of investments. One thing is certain, that whatever its shortcomings there is no organized body of business men where the standards of integrity are higher and more fixed than on the New York Stock Exchange. Its transactions are carried on chiefly by word of mouth; the spoken word being as sacredly kept as signed contracts. ”

“ Such disclosures of bankers’ commissions or profits is demanded also for another reason: It will aid the investor in judging of the safety of the investment. In the marketing of securities there are two classes of risks: One is the risk whether the banker (or the corporation) will find ready purchasers for the bonds or stock at the issue price; the other whether the investor will get a good article. The maker of the security and the banker are interested chiefly in getting it sold at the issue price. The investor is interested chiefly in buying a good article. ”

“ The promoter of these enterprises does not permit himself or his affairs to come under the scrutiny of the banks, the Stock Exchange, or the Clearing House. He fights shy of the curb market as it is now organized, and avoids the watchful eye of the metropolitan newspapers that enjoy the pastime of exposing frauds. ”

“ And moreover as regards Stock Exchange speculation it is unfortunately much against the interest of the stock broker to make public the failure of his clients, hence it is seldom that the wholesome warning of publicity deters others from entering the arena.
Outsiders entering upon speculation with professional dealers in the Stock markets make two mistakes on the threshold. Firstly, they commence upon unequal terms, the effects of which adventitious favourable influences have never more than compensated for, in the long run. ”