Here ya go. Chew on this one awhile
Piggyback Trades Don't Qualify as Foul Play
By James J. Cramer
05/23/2002 01:29 PM EDT
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Piggybacking is a time-honored concept. Let's say a big buyer of puts surfaces -- and he does surface because everybody wants to know flow.
I will walk you through the process: Hedge Fund A comes in and buys 500 puts on Bristol-Myers (BMY:NYSE - news - commentary - research - analysis). Why does he do that? Maybe he read any of the numerous headlines that said that Bristol-Myers was going to blow up. I can't even count how many times I read that.
The trader who handles the order, after he places it and gets the order done, picks up the phone, calls other accounts and says "SmartGuy buying Bristol puts." Right now, that is legal to do. In fact, it is called merchandising flow, and until it is outlawed, that's what will happen.
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Hedge Fund B gets that call and its trader takes a look at what the printed stuff is on BMY; he checks Bloomberg, RealMoney Pro, MarketWatch, Dow Jones and Reuters. If he sees something -- and in this case, he would have seen tons -- he piggybacks: He buys 500 puts himself.
Next thing you know, there are two put buyers of Bristol and lots of hedge funds that do nothing but monitor put activity see it. Then they do the same checks.
And so on.
That's how Wall Street works. Given the "mood" around Wall Street these days, I bet that some people are going to say "that's outrageous" and demand that nobody be told about orders. Others will probably start saying "it is not fair that people even buy puts as you would only buy puts if you know something bad is going to happen, and if you know something bad is going to happen, then you know something someone else doesn't know, which means you have inside information, which means you should be prosecuted and should go to jail."
Again, don't kid yourself. That's where we are going. When we started down the path of Regulation FD, which said that no one could have a legal edge over anyone else and that any edge is simply illegal, we started inexorably down a path that says if you know anything anyone else doesn't know, you can't trade on it.
Ultimately, if you are able to outsmart or outthink the market, you will not be able to prove that you did. You will be per se, an "insider." That's wrong.
An insider is someone who has material inside information or was given material inside information. If you have material inside information from the company or one of its agents or someone deemed an agent and you trade on it, you can get in trouble. But if you have figured out something on your own or read something that was not widely disseminated that was intelligent and honest and hard-hitting, you aren't doing anything illegal. There is a clear distinction in the law, but the situation has become so fluid that people are going to be worried that they crossed the line even if they didn't.
I can see a world where people who buy puts are immediately going to be handed over to the SEC and anyone who piggybacks off them is going to be investigated, too. They will be presumed insiders or tippees!
Unless they are wrong.
Where does it all end? Pretty simple: If you aren't allowed to have a legal edge over anyone else, I can see a world where beating the market is an illegal game, per se. I can see a world -- and believe me, we aren't that far from it -- where outperformance is considered crooked and any attempt to defend outperformance will have to fail.
I can tell you that this world I see is a world that is untenable for the vast majority of hedge fund managers. It is a world where insight will be a detriment and intelligence a distinct liability.
Oh sure, I can see people saying that there are always examples where you can still find out something that is relatively unknown through reporting and research. But that still will lead you to be investigated as the government will most likely be interested in why you outperformed.
I know this: Right now, if I were at my old job and someone from the sell side came to me and said "size buyer of puts, Bristol Myers," I would say "no thanks. Too dangerous to look."
What a nightmare. |
