The Games Traders Play
Wall Street rumors are under investigation by the Securities and Exchange Commission, and so they should be.
For an entire week in October, the stock market was largely driven by takeover rumors affecting 20 corporations. Millions of dollars were made by some and lost by others in frantic activity that raised profound questions about the prudence and judgment of big traders. Now the crucial questions are: Was that trading based on insider information? Was it inspired by false information deliberately planted by those in positions to profit from quick surges and declines in prices? Or was it the result of legitimate speculation on the part of wily investors seeking to anticipate logical corporate reorganizations?
“It is troubling,” Gary Lynch, director of the division of enforcement of the SEC, said.
But he was candid about the difficulties of tracing rumors to their sources. The SEC has been effective in uncovering some cases of trading based on insider information--that is, financial data not available to the public, strictly prohibited by law. The SEC has the power to bring action against anyone spreading false information, but, as far as can be determined, it has never traced a false rumor to its source.
The rumormongers are a challenge to the integrity of the market. A three-month investigation by the Wall Street Journal exposed extensive use of false information by specialists in selling short, some of whom plant negative data regarding specific companies after they position themselves, with options and stock-index futures, for a decline in the value of the target stock. The volatility of the market in response to mergers had created a situation ripe for abuse by manipulators. Fortunes have been made by those correctly anticipating rises in stock prices driven by merger struggles. Those success stories have left investors more responsive to merger rumors.
The result is to contribute to a trend in securities dealing toward more and more speculation, creating what Business Week recently called “The Casino Society.” The Chicago Board of Trade, in a recent display advertisement, promoted its futures market as a device not only for risk management but also for “speculative opportunities.”
In the meantime, billions in investment capital are moving through the games of the casino into leveraged buyouts, takeovers, almost never creating productive jobs or enhancing the real product of the nation. The situation is certainly one that invites the active intervention of the SEC.
