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Insider's Take on the Insider Trading Scandal


Unintended consequences and the letter of the law.

The easiest thing in the world to do is say "Wall Street is evil" and throw every hedge fund under the bus.

I've read a lot of news reports overnight and virtually every one of them adopted the same populist cry. I even saw Inspector Kemp interviewed on this topic, where he said, and I quote, "A riot is an ungly thing... undt, I tink, that it is chust about time ve had vun!"

Earth to Matilda -- not all hedge funds are evil. The majority of the industry is comprised of good people making honest livings, or at least they were considered honest when free market capitalism had a positive connotation.

Don't get me wrong; if someone crossed a legal line, throw the book at them and demand restitution but let's not try the industry in the court of public opinion and assume they're all criminals. That's misplaced anger and endemic of a broader shift in social mood.
I don't know what the Feds have on the folks involved in this tangled web of information. My gut says there were wiretaps involved and again, if wrongdoing is proved beyond a reasonable doubt, let's rinse the industry so those operating within the letter of the law rise to the top as they should. I will offer there are shades of gray involved and that's worthy of a mention. "Channel checks," once considered hard work and due diligence, are now being fingered as proof-positive of wrongdoing.

In 2006, we published The State of the Art and offered that the "trick" for the financial industry was to proactively adapt before the trade passed them by. Indeed, we've been openly critical (sans acrimony) of banking and bankers when warranted, as evidenced by our proactive stance years before the crisis erupted. Many of those dynamics remain in place -- FASB 187 would still sink the system, if passed -- and yes, we need better enforcement if we're to safely traverse the financial crisis.

As a proponent of financial literacy and a champion of individual investors, I applaud efforts at increased transparency and proactive regulation. As a twenty year veteran of the financial industry and a citizen of the United States of America, I can't help wonder if The War on Capitalism has officially entered the next phase.

There are structural issues to consider as well. Hedge funds provide necessary liquidity as market-makers such as Goldman Sachs (GS), Morgan Stanley (MS), JP Morgan (JPM), and Deutsche Bank (DB) wrestle with their own regulatory demons and black box trading dominates the flow. That unintended consequence is not an insignificant point; without liquidity, there are only so many natural buyers and sellers, unless you include the United States Government.

I'm not here to defend those who cut corners. If trading is a zero-sum game, their profits came at the expense of the rest of us. At the same time, the populist should be careful for what they wish, for if the hedge fund industry were to disappear, the specter of free market capitalism will be forced to endure an entirely more profound pathway.

Good luck today.


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No positions in stocks mentioned.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at

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