How do you reduce or lessen the amount of illegal insider trading activity in the stock market? It’s pretty simple really, just force companies to release more information. It can’t be that easy, can it? I don’t think so, but that’s what James Surowiecki proposes in the New Yorker this week:
The rewards for having inside information are enormous. Technological advances mean that companies have a much better real-time sense of how they are doing than they once did. Yet many companies have reacted to economic uncertainty by disclosing less information; fewer of them offer even quarterly-earnings guidance to investors, for instance. Insider information these days is therefore both better and more valuable than ever. What’s more, in the past two decades the market’s reaction to earnings surprises has intensified, so the payoff when you bet correctly has increased, and things like derivatives make it easier than it once was to place big bets without arousing suspicion. (New Yorker)
What he’s calling for, companies to give guidance and release more news about their companies more often, should not only reduce the rewards of insider trading, but also the volatility of the stock’s who do release more information.
But, the world of the stock market and business in general isn’t that simple. Sure, more info is better, yet companies are going to make mistakes, poor choices, bad business decisions, and their stocks are going to suffer for it in the long run. Biotech companies are going to have their new drugs approved or not by the FDA. Banks are going to make good loans or bad ones and it will eventually catch up with them. Apple’s going to come out with a smaller and better iPhone. Do I buy coal stocks or solar. Do I buy the 3D makers or Hewlett-Packard….
There are still going to be those greedy folks who are going to try to seek out insider information on when a drug is going to be approved or not by the FDA or when a new Apple product announcement is going to occur. Greed isn’t going away any time soon no matter how much information a company releases. Really, it comes down to the choices a company makes as a business over the long haul.
Each company develops it’s own pattern of how they control their own news and guidance. Apple was known for giving a light guidance and crushing it each quarter until they didn’t. Traders learned this pattern and expect Apple to crush their numbers, if they didn’t, then the stock suffered.
Again, while more info will reduce some stock fluctuations, it comes down to the companies choices. Do they buy back stock when their companies is soaring or when there’s a down turn in the economy and it’s cheap? Do they spend widely on poor acquisitions? Do they reward their shareholders with a dividend when they are making a lot of money?
In a way, these good or bad company choices, are what makes the stock market exciting and dangerous at the same time. Trying to pick winners and losers. Trying to make money in the market. Trying to figure out when a stock is on the rebound versus about to fade into oblivion.