My desk phone rang. I picked it up on the third ring. I politely returned his greetings. The voice sounded hollow and distant, most likely an overseas call. Mind you, it was pre-VOIP era and mobile phones were probably still in the laboratory. Anyway, I inquired as to the reasons for the call as I was not familiar with his English name. He spoke Queen’s English with a tint of foreign accent, as if he were trying to pass off himself as an English gentleman. I let him articulate at length the purpose of his call.
He started by commending me of my success in life as if he were my close acquaintance. I guess to soften me up so that I would put down my guard. I immediately detected disingenuousness in his charm coated flatteries. He mentioned that he came across my name from some Wall Street sophisticated investors list. Yeah right, it was called the Suckers List. I held my peace. Then he went on to introduced his company which sounded like some Wall Street firm. Interesting, Wall Street twice in the same breath, I must be proud to be listed and now this personal call.
Before I could interrupt, he quickly continued that his firm had recently come across some sensitive insider information on certain US-based company whose shares were listed and quoted on the Stock Exchange of New York. The price of that company will be going through the roof once the information is made public and you do not want to miss this once in a life time opportunity to ride the upswing. He sounded credibly convincing.
I tapped on my desktop and checked the name of the company on Bloomberg. Yup, it is there. He prattled on with his sales pitch that I should jump onto the bandwagon as soon as yesterday. He assured that his firm should be able to get a block of the shares just for me if I am interested. When I did not reply immediately, he quickly continued and gave me the settlement details of his firm’s banker in Singapore, a very reputable Main Street bank, to allay any doubt. I played along and asked how much should I invest.
“Let’s start small. Small bite size investments to get know him and his firm. How about US$100,000?” he replied. I dilly dallied. He sensed my reluctance and downsized the amount to US$50,000 which rapidly dropped to only US$10,000. Come, Mr. Successful and Sophisticated Investor, you could surely afford to punt US$10,000, small change, right. I hemmed and hawed noncommittally just to drag the phone call as long as I could. International call charges were exorbitantly expensive in those days.
I could smell his desperation when he lowered the figure to just US$1,000. Then I asked whether his investors list has any details of my current employer as Nomura Securities? Either the name did not register or his synapses were busy firing away for ideas as he sounded distracted when he lowered the figure to a meagerly US$500. I re-iterated that Nomura Securities happened to be one of the world’s largest securities houses. We eat and shit securities at Nomura 24/7. I told him point blank to get a proper job in a proper firm, not in his present bucket shop and stop conning people. I slammed down the phone and could not wipe the smile off my face for the rest of the afternoon.
If I had remitted the US$100,000 that will probably be the last time I see my money. Any attempt to trace the firm thereafter will probably end up at some non-existent address on Smoky Mountain slum or below Chao Phraya River. If the initial remittance is small, they would most likely follow up with some fictitious favorable analyst reports of missed opportunity to lure me into investing a larger sum before they magically disappear into thin air.
We call these firms, bucket shops, because the “bucketeers” simply take all the investment monies, metaphorically putting them into a bucket, without any executions of the underlying transactions through any regulated Stock Exchanges, i.e. no transfer or delivery of the underlying securities. These non-existent transactions are only nominally recorded on the firm’s books and any supporting letters, contract notes and/or confirmations would be generated and printed in-house. Such firms could be easily and are always set up to operate in any unregulated countries outside the reach of the regulators of the underlying securities and where the regulations over such stock broking activities are lax.
Don’t be fooled by correspondence printed on premium papers with embossed letterhead, official looking contract notes and/or statements of account sent to you. They are all easily generated and printed in-house. Even the accurate analyst reports are but a cut and paste away, and remember hind sight forecasts are always accurate. Such firm can be easily set up, simple and rudimentary with only a telephone, desktop and printer, and of course a slick financial jargon coated forked tongue. You don’t need a Starship Enterprise.
One simple way to imagine the above is to picture your placing of some side-bets with illegal bookies. You can be assured of your winning’s payout with Magnum or Toto. Illegal bookies will probably be around to payout small winnings but once you hit the jackpot, they will likely make a Houdini disappearing act before you.
Since I mentioned that my “bucketeer” claimed to have some sensitive insider information, as would most “bucketeers” in town, you would probably want to know what is so sensitive, who is the insider and what information am I talking about? I believe we have all read or heard about so and so had been convicted for insider trading. The key word is trading. If you happened to get your hand on some insider information of relevant listed company but do nothing about it, you can sleep soundly at night. No Hollywood FBI poundings on your door at midnight.
However, if you trade (buy or sell) in the underlying securities when in possession of such information then pray that the prosecutor would deem you too small a minnow to fry in court, a waste of time and money, stamped “No Further Action”. However, that does not mean you will not be cordially invited for some not too pleasant coffee catch up with the regulator’s investigation, probably interrogation, team. Why put the Sword of Damocles above your bed, right?
Sensitive information is essentially confidential information of the company which may affect the price of its listed shares that is yet to be announced or made public. Insiders are those officer or executives who have or have access to such confidential information. They are usually restricted from trading in the relevant shares for a blackout period prior to the announcement of or making public such information. Whether the information is favorable or adverse, whether you make a profit or suffer a loss or just breakeven and whether the price of the shares goes up or down or stays the same, so long as you buy or sell the shares you are in breach of insider trading regulations, “SALAH”. Additionally, be careful about passing such information to family members or close friends or anyone because if they act on it, you are culpable by association, also “SALAH”.
Anyway, most of these insiders are usually quite clever covering up their tracks. Trading through some distant and multi-layer anonymous nominees set up in some foreign tax haven countries or as part of some trading program of some international offshore funds. They operate in the unfathomable murky world of global finance no much different from predatory sharks swimming in the deep murky ocean, both are difficult to find and damn difficult to catch. Perhaps, that explains the dearth of their convictions from insider trading.
I am more concern with the aunties and uncles, unsophisticated or non-accredited investors or just plain retail investors as they are called world of high finance, minnows. They are most likely the ones who would not be able to discern whether the insider information is real or fictitious and whether leaked intentionally or inadvertently. In most cases, they are likely to buy up if the information is favorable, and sell down if adverse. This decision is correct if the information is real but our innocent aunties and uncles may innocently end up being prosecuted for insider trading. On the other hand, if the information is fictitious, our innocent aunties and uncles though will not face prosecution but they would in all likelihood lose their skirts or pants. Heads they lose tails they also lose.
Clever insiders can easily manipulate our minnows through misinformation. Any insider information leaked will be happily lapped up by them when it seems to be from the horse’s mouth, or more aptly shark’s jaws. These insiders could easily leak favorable misinformation to deceive the market into buying up their shares, knowing that they can later buy them back cheaper once the real adverse information is announced. In finance jargon, they short the shares only to buy back to cover post- announcement.
On the flip side, they could leak adverse misinformation to lure the market into selling down the shares to them and they can later sell back at a higher price after the real favorable information is announced. In finance jargon, they long the shares only to sell back into the market post-announcement.
My rule of thumb is quite simple if the purported insider information has finally trickled down to our aunties and uncles who inhabit the lowest rung of the investment world it is most likely rumors or stale, has been acted upon, too late, the boat has already left harbor. And even if it is from the horse’s mouth, I would take it with a bowl of salt. Remember, heads you lose tails you also lose. So it is safest to just ignore them altogether.
Remember the rough and tumble of the securities markets are not meant for the faint hearted. Be prepared for the volatility. If you can’t sleep when prices go against your positions you are probably better off investing in calmer waters like unit trusts or mutual funds or just placing your money in fixed deposits. If there is some iron in your heart, do your homework on the companies before investing in their shares. Check them thoroughly out first. Open the bonnet and kick the damn tyres. Focus on fundamentals.
Don’t simply follow the herd. Remember sharks may just be corralling their dinner. Don’t be easily swayed by braggarts. Remember success has many mothers, failure is an orphan. Don’t blindly embrace analysts’ views. Remember in strong winds even turkeys fly. Don’t get anxious if miss buying at the lowest trough or selling at the highest crest. Remember you are just human, not perfect, like everybody else.
Take a longer term view to ease the ache and moderate ecstasy. Try to avoid volatilities from contra trades. They are for brave hearts. Invest only the sum you could afford to lose. Preferably, try not to borrow. Yeah, I know it is always once in a lifetime opportunity. Your reliable source said so. Before you get carried away just remember bankers are fair weather friends. Finally, if you think you can outsmart the market, not think again, just don’t for it will inevitably bring about your precipitous downfall.