Insider Trading Has Gone on 'Forever '  [So Has Prostitution].

[ by Howard Haykin ]

Bernie Madoff's sent a 2012 Christmas Eve Letter to CNBC and "a handful of attorneys and academics he has been communicating with," opining on the ills of modern finance.   During the year, Bernie agives only a handful of interviews and, while he prefers not to speak on the record about his case he's okay with sharing his views on the financial markets.

From his cell at the federal correctional complex in Butner, NC, Bernie's emailed letter opens with the comment that "insider trading has gone on 'forever '. "   He also vents about a lack of transparency - or excessive "opacity" - in the financial markets, and says the growth of hedge funds is forcing market players to take outsized risks in order to earn decent returns.    Bernie's XMas Letter continues with specific offerings of statements on a range of topics:

Insider Trading.   "(O)ne would be led to believe that with the recent spate of insider trading prosecution that insider trading is a new development.  This is false. It has been present in the market forever, but rarely prosecuted. The same can be said of front running of orders."

Dark Pools.   Markets are suffering from a "lack of transparency" created by the growth of so-called "dark pools" - arrangements outside the established stock exchanges that allow parties to trade stocks privately, with trades and prices only disclosed after the fact. 

"Institutions have always attempted to guard this buy and sell information from exposure to the market for fear of being front run."  "Certainly they are entitled to have this right of confidentiality.  That said, the more secret this information, the more valuable this information is to those that can obtain it.  Therein lies the problem.  It is nave to think that there will be no leakage of this information."

Hedge Funds and Feeder Funds.   What would Bernie Madoff have done without "feeder funds," a source of billions from investment managers who probably were complicit in the Ponzi scheme.  But time seems to have softened Bernie, and he now says the rapid growth of hedge funds and feeder funds - and their commissions and fees - have created a problem for investors and regulators.  "It has been this additional layer of costs that have created the need for more risk to be taken to earn worthwhile returns. This has created a minefield of regulatory problems involving the very reasons that the desire for a lack of transparency has grown. Both of these areas are going to be the greatest challenge that both the industry and the regulators are going to face."

 

Here's the full text of Madoff's letter:

A number of you have been asking my views on a couple of subjects that I am comfortable in going on the record, because they are not related to my case. there for(sic) the following are remarks that you are free to use for whatever value you feel are appropriate.

The issue of electronic trading has recently been focusing on the lack of transparency of the markets with the emergence of DARK POOLS.

This has now spread to the recent acquisition of the NYSE . While I have always been an advocate of electronic trading due to the efficiency the lower costs they bring o the markets, I am nit (sic) a fan of the lack of transparency the DARK POOLS create.

It is important to examine why there has been this growing interest in the use of dark pools. Markets have always focused on the speed with which information becomes available. Of course this information can be composed of various types.

It could be corporate developments like earnings or mergers or it can be information regarding the placements of buy and sell orders and who is placing these orders. It is the latter information that has created the interest in the dark pools.

Institutions have always attempted to guard this buy and sell information from exposure to the market for fear of being FRONT RUN. Certainly they are entitled to have this right of confidentiality.

This being said, the more secret this information. The more valuable this information is to those that can obtain it. Therein lies the problem. It is naive to think that there will be no leakage of this information.

Although one would be lead to believe that with the recent spate of Insider trading prosecutions, that insider trading is a new development. This is false. It has been present in the market forever, but rarely been prosecuted. The same can be said for front running of orders.

The other area of discussion involves the growth of hedge funds, particularly feeder funds. In spite of the early held belief. of which I was of this opinion, that the extra layer of costs related to commissions and profit sharing that went along with feeder funds.

They have continued to grow. It has been this additional layer of costs that have created the need for more risk to be taken to earn worthwhile returns. This has created a minefield of regulatory problems involving the very reasons that the desire for a lack of transparency has grown.

Both of these areas are going to be the greatest challenge that both the industry and the regulators are going to face .


For further details, go to:   [ CNBC, 12/25/12 ].