Insider Trading for the Public Good

in Money/The Political Slant by

*Who would think that Members of Congress have one unique skill: picking great stocks?  According to an academic paper, “Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives” in the Business and Politics journal,  states: “We find strong evidence that Members of the House have some type of nonpublic information which they use for personal gain.”   Yes, Members of Congress do receive quite a lot of non-public information as a regular part of their job.  Trading on non-public information is a crime, but it is generally a difficult one to prove.

In 2011, Congress passed the STOCK Act, which bans insider trading by Members of Congress and also requires Members to disclose which securities they have bought or sold within the last 45 days.  The original law also  gave the public an easy way to access this information.

In 2013, an amendment was passed that made it more difficult for members of the public to search these disclosures.  Unlike some people, I actually do not believe we should ban insider trading.  I think that the act of trading sends signals to the markets that someone “knows” something.  If a lot of insiders are buying, and they are buying on high volume, it is impossible to hide this from the markets because people see the volume.

Further, I also believe that it is not possible for Members of Congress to police itself.  Human nature suggests that it is not possible to have “ethics investigations” by your colleagues.  Consider the last time a Member of Congress was expelled was in 2002.

Rather than try to get Congress to act contrary to human nature, I believe that all of their trades should be made public instantly. 

…the act of trading sends signals to the markets that someone “knows” something.”

This is 2020: we have the technology to link the brokerage accounts of Members of Congress and have their trades available instantly to the public.

This will allow some ETFs to replicate the trades for the public so that people will actually have an easy way of getting the same good stock returns that Members of Congress currently get.

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Michael Gordon is recovering attorney in the Los Angeles area.  He is a YouTube personality who delivers videos about finance and travel at:  https://www.youtube.com/user/sardonical11  He also travels all over the world and takes fantastic pictures for his Instagram audience.

Ziobrowski, Alan J.; Boyd, James W.; Cheng, Ping; and Ziobrowski, Brigitte J. (2011) “Abnormal Returns From the Common Stock Investments of Members of the U.S. House of Representatives,” Business and Politics: Vol. 13: Iss. 1, Article 4. DOI: 10.2202/1469-3569.1308 Available at: http://www.bepress.com/bap/vol13/iss1/art4

 

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