One of the things that people hate the most in the World of trading and investing is that of privileged information.
Later in the article I will give a very clear Forex example, first let us talk a bit about privileged information in the markets and the everyday life.
Nobody likes that others may win because they have access to secret information.
We can be sure that the amount of privileged information is far bigger now than it was 100 years ago, when Jesse Livermore used to trade the markets.
Of course, there was privileged information but as the size of the State was smaller the number of scams was fewer.
In fact, the supposed insider information in the stock markets does not worry me too much.
After all if you are the Financial Director of a company you should be the first to know if the business is well or not and act accordingly.
I do not see anything wrong with it, but curiously it is the kind of “privileged information” that people hate the most.
Something different is if we have some CEOs talking well of the company business in the middle of stock price collapse when they actually know that the business is insolvent.
In that case they are blatantly lying.
Although, stock prices normally do not lie: If the price is falling like a rock it means there is something rock probably, especially if the overall market is bullish or neutral, no matter what the CEO says in a public meeting.
For instance, when you are the director of a pharmaceutical company and have “friends” in the “Health department” that tell you: “that medicine is going to be approved in 10 weeks”.
In that case, both the director and the government workers can make outstanding profits either directly or indirectly.
Example of privileged information
This is a very Spanish type of case although I am sure it happens almost everywhere.
There is the typical guy in charge of building and Estates in the Council.
He decides what land goes from agricultural to urban, making the price being multiplied by 100.
Is it fair?
Well, it would be if the Council man was not corrupt and avid for money.
Unfortunately that is not the case.
There nowadays no way you can make business in a significant way without asking permission to the State in any of its forms.
Once the State is the overall regulator or all business activities we can only expect it to become somehow making some people richer than others.
In this case you better get on well with the guys in charge of the council or State department.
Obviosuly, as there are more regulations for any kind of market there will be more cases when you have to ask for permission to do anything. As it involves someone, the State worker, with power to allow you or not, the number of “privileged information” or “corruption” cases can not do anything but grow exponentially.
This should be easy to understant but it is not, actually.
The Hegelian dialectic in this case when things seem not to work efficiently, is: “well, the problem is that we need more State, obviously”.
Most people think it is the companies the ones responsible for the corruption and privileged information. It comes instinctively.
They do not think that the real problem with all the speculation and privileged information comes with the extreme levels of regulation in the market.
Let us have a look in some of the financial markets and how some privileged information might work there.
Forex privileged information
For example simply think of a day like the Black Thursday in Forex when the Swiss franc was detached from the Euro in a move that caught most private investors off guard.
Do you think everyone was off guard in that case?
Do you think the guys in the Swiss Central Bank and their “friends” did not know about it?
Imagine that a few weeks before the decision some of the Central Bank guys told some other rich guys outside that there was a decision coming concerning the Swiss-Euro relation.
It is not difficult to imagine that those people acted accordingly, taking strong positions against the euro or in favour of the Swiss Franc, knowing beforehand that the market would completely collapse.
Can you imagine the amount of money that could be made with that privileged information?
Well, things like that happen quite often, as every time Dragui says some significant information about the “Euro economy”.
Those kind of decisions are not know by the vast majority of the population who spend their time watching football.
As I said before, when something like this happens and the masses are furious, especially after some of them having been ripped off, their answer is to ask for more State, for more regulations, so the guys in charge of the State cannot help but laugh knowing they will be able to do even more money in the future.
The typical scapegoats in these occasions are the so-called speculators and “capitalists”, who normally are just the average guy who tries to do some sort of trading individually without any connection to the government.
The government and the big guys of the multinationals are the last to suffer any consequences.
In a very counter-intuitive way, when the size of the State grows the amount of corruption and privileged information grows exponentially.
In fact, there are certain people conscious of that process of State growth and act in consequence, offering the “solution” to every problem created by the State if first place.
Original article: El Estado, La Bolsa y la información privilegiada