Confessions Of A Dark Pool Manager — Trading On The Inside
Have No Illusions — Insider Trading Is Prolific
This is a bitter lesson for anyone that is under the impression that markets are fair and equal.
They are not.
Let’s start with the institutional realities of insider trading. Most investors do not understand that insider trading is not illegal in all countries. This being the case, then the question arises, which countries actually enforce the law regarding this activity? The answer is, most countries do not enforce the law regarding insider trading. In fact, most countries do not even care or have the resources to stop it.
For example, if Malta instituted a wealth tax― they would have no power to enforce a tax on your combined wealth. Just as Monaco has no power to enforce insider trading laws. Or the reductio ad absurdum, that in China it is not illegal to steal from Americans.
Of course, as a side note, if you were to break the financial laws in Monaco. You would be sent to one of the most beautiful prisons in the world. Where you would be periodically dining on caviar served with filet d’espadon overlooking the French Riviera.
Then the question becomes:
Where can you legally trade on the knowledge that you have?
To start with, a “dark pool” is just simply a private venue where you can trade securities without your settlement being made public. This is excellent for senior executives that need privacy for large orders. This is so they don’t disrupt their company’s share price. In this way, shareholders can be protected from high volatility. From my experience, most large shareholders just want to hedge their positions and stop any potential losses.
Let’s have no illusions, insider trading is prolific.
It is used by multi-jurisdictional investors every day and dark pools are their destination of choice. Most dark pool managers have no way to understand why their clients are trading a particular security. Nor do they have a legal right to ask, in most cases.
Who trades on inside information?
Anyone with inside knowledge. This would include, anyone that knows that the price of copper will rise. To an executive that knows what their future company share price will be.
This especially applies to parliamentarians that know how their monetary policies will affect their currency. They can easily make thousands of different investments without calling attention to themselves. There are endless methods and combinations and there is no way to discern the difference between insider trading in most cases.
Let me make this clear, there is no way to stop it.
Most insider trading is legal, and discerning the difference between a legitimate and Insider transaction is almost completely impossible in private exchanges. And compounding the “insider effect” is the complexity of blockchain assets―whatever form they take.
I know what many of my readers are thinking. I live in the United States and I will get in hot water if I break the law. The fear is perfectly reasonable and you should never break the law. However, not all jurisdictions are the same and one man’s hell is one man’s paradise.
For example, trading the price of copper, based on your contacts in Escondida may be illegal in the United States― but the authorities in Geneva may have a different opinion.
In contrast, in Monte Carlo, your currency insight will have you flying in a helicopter to a beach in Sardinia. At the same time, your colleagues will be giving you pats on the back for Innovation and tenacity. Completely protected in the knowledge that you obeyed the law―as it’s written. Whereas in the United States you’d be thrown into a dungeon.
Adding to the prolific rise of insider trading globally is the perception of weakness in American power and reach. The abandonment of Afghanistan coupled with internal class inequality has weakened American moral legitimacy. This has weakened the American grip on global finance as well. Hence, the rise in global insider trading.
Contrary to popular belief, if you trade on the inside in the United States that’s perfectly fine. You simply just need to pay for the privilege to do it.
What does that mean?
Let’s assume you are managing a large fund in the United States. How do you trade on the inside without getting thrown into Rikers Island? A place where the first stay could be your last!
Obviously, you need protection.
The U.S. Attorney’s Office for the Southern District of New York is the most prominent for prosecuting financial crimes in the state of New York. In the Southern District, prominent attorneys retire after 20 years. So…What is to become of them I wonder…?
In general, these people are 45 years old and ready for a second career. I have good news! There’s a job waiting for them at a large fund. In some cases, a well-known attorney’s base can start off in the tens of millions―including bonuses. Of course, this deal applies to former Securities Exchange Commission (SEC) officials as well as other federal agents. All are welcome, and their pay reflects this reality.
If your fund is under investigation―you’re met with this compliance team at the front door.
Meaning, that if you’re a heretic that wants to “tip the applecart”. One phone call will have you assigned to a newly formed field office in Hyder Alaska. There, you will be investigating manure smuggling rings from Canada.
Just imagine writing long reports and freezing on some snowdrift in British Columbia―eating cooked beans with your “international partners” the Canadian Mounties. Quietly, passing gas next to some campfire under the Big Dipper. Sadly, most marriages will not survive this experience.
This does not mean your fund has a free ticket to break the law. This means you have the ability to operate in the gray zones. If you operate outside of this system you’ll be thrown in federal prison.
Obviously, as you can read, the universe in high finance is anything but fair. But, why does it exist? All of us ―without exception― are born into a system that was simply passed down to us. This being the case, the United States’ strength comes from its military and from the free flow of capital into the equities and commodities markets. The symbol of which is the NYSE and CME. There, the price of equities, oil, and corn are set. Of course, this is not possible unless the United States has World Reserve currency status and military supremacy.
Indirectly, US Federal authorities will protect that arrangement as long as you play by their rules. Federal authorities know if they build prosecutions against American financial institutions―the capital will instead flow to places like Hong Kong, Singapore, Germany, and Switzerland. In the case of Switzerland, in 2009, they weren’t persecuted over taxes. But rather, this was a case where the New York (limited hangout) crowd was simply settling a score. Which is another story for another time.
Insider trading is prolific and will never end― just as doping at the Tour de France is a part of the race. If you show up (clean) you will be dropped.
—Roman