Insider trading is bad. Financial information isn't free (expensive!), and kinda hard to get. I'm gonna get it anyways. Join me for my journey
Hi 👋. Welcome to my Finance series. I lay out below what I hope to achieve in this blog series. If you want to know more about me check out my General series.
The idea of being able to "see" what nobody else can see is something that I find fascinating. In "The Big Short", Michael Burry does just that. Looking at an excel spreadsheet filled with the information on multiple Mortgage-Backed Securities (MBS) he was able to predict the 2008 financial crisis. (Yes I am aware that it may not have been reading spreadsheets alone, but that will not really matter in this post).
I remember after that movie thinking, "Man, if only that was me! If only I had read that spreadsheet, came to that same conclusion, I would have made that very same bet!"
I begin this series on finance with a mission I am on, but also with a rant about a frustration that I have.
I can't remember when I first learned what insider trading was, but I'm fairly confident I didn't care much about it. On the other hand, I do remember reading a fantastic book: Den of Thieves (James B. Stewart)) on one of the largest insider trading scandals on Wall Street.
If you are not familiar, here is the definition of illegal insider trading according to the SEC:
The buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.
In short, what happened was a bunch of Wall Street finance guys decided to insider trade and make lots of money (duh). Surprised as you may be, they actually got caught, and the SEC actually cared. Michael Milken, one of the main insider traders (trading in Junk Bonds) was sent to jail (and was recently pardoned by President Donald J. Trump).
Anyways, I recall being shocked how long this scandal lasted and I was relieved to read at the end these thieves were caught. Insider trading is unequivocally wrong.
But why not? What really is wrong with insider trading? All these traders are doing is leveraging some knowledge in order to profit. Isn't that what large, successful businesses do all of the time with their products? No. It very much so is not.
According to Investopedia (and arguably common sense) illegal insider trading is defined as:
The question of legality stems from the SEC's attempt to maintain a fair marketplace. An individual who has access to insider information would have an unfair edge over other investors, who do not have the same access, and could potentially make larger, unfair profits than their fellow investors.
In short, we want a fair marketplace. Nobody should have an unfair edge.
"Fair" & "Public"
Although the insider trading section of this post may seem as a bit of a digression, it isn't. In my opinion, it links up really nicely with the start of this post on "The Big Short" and ties right into my rant.
The marketplace is not "fair". This stems from the fact that public information is not really "public" (in respect to what the SEC means as public, in my opinion).
About three paragraphs into this post, I was drooling at the fact that if only I had read the spreadsheets that Michael Burry had, I would have made a similar bet (if I had any money), and would have made an absolute killing (To be honest, I probably would have just seen a bunch of numbers and not thought much of it, but lets pretend I would have seen what he saw). In reality, that scenario could not have occurred. I simply would never have had access to those spreadsheets.
To be honest, I have absolutely no idea from where he got that information. Let's assume he got it from a very common/classical data source: Bloomberg terminal.
A Bloomberg Terminal is one of the (if not the) most common financial pieces of software. It has everything you'd want (from what I hear). If you wanted to get the information on Mortgage-Backed Securities (MBS) like Burry did, you most likely could find it there. Want to know stock prices? They have it, easily accessible. Bond prices? Yup. If its publicly available, they most likely have it.
So stop ranting Ehud, get Bloomberg Terminal and you can be just like Michael Burry!
Bloomberg Terminal, according to Investopedia (somewhere on that page) costs $24k a year/user (investopedia cites Wall Street Prep).
That's about as publicly available / accessible to retail investors as Grandma's Bolognese secret recipe is to your girlfriend of 2.5 months. It ain't.
Well, what if I wanted to write a bot (computer program) to trade using real-time stock market data? Surely the stock market data is freely accessible to everyone. Nope. Polygon, a stock market data source provider, costs ~$200/month for real-time data (pricing here).
Disclaimer: I recognize that I've focused on Bloomberg and Polygon alone and that other data providers exist. Other providers maybe cheaper, but the point remains: very little information is easily accessible to the layman, and if it is accessible, its cost can be prohibitive.
The point is this: the marketplace is "fair" for hedge funds, investment banks and other large financial institutions. They really do have access to all the same data once it is publicly available. They share information with each other. Seeing that retail investors have entered the market en masse in recent years it has become clear to me (as a new retail investor interested in data) that the market is not, in fact, fair and that data is not public (unless you have 24 grand lying around, collecting dust).
To this end I've been trying to source my own data; company financials, short interest, etc. To do so requires mastering the jargon used on Wall Street. I plan on doing so, and hope I can illuminate some of these topics for you on my journey.
[Edited by: Elliot Eisenberg] 🙏