Over the last decade, Washington has become one of the financial world’s new hubs. Increased regulations and oversight like Dodd-Frank, Obamacare, Sarbanes-Oxley, the EPA’s aggressive emission controls and the creation of a Consumer Financial Protection Bureau now give Washington lawmakers significant sway over the financial world.
One unintended consequence of all of this is that it has made insider trading easier. With so many new rules — and those rules so often changing — Capitol Hill has created a market for information on what the latest changes are going to be. DC firms that specialize in this — called “political intelligence” — have multiplied.
Because the legislative and regulatory information can affect markets, it can have serious value. And given the sheer number of things Washington regulates, the number of people invoked in crafting them, and the city’s gossipy, leak-prone nature, there is a lot of information to be had.
This trade exists in a legal gray area since anti-insider trading laws are geared towards private-sector information. Washington regulators have tried to crack down on political intelligence but are often frustrated. The Wall Street Journal today notes that a joint Securities and Exchange Commission and FBI probe into leak regarding an upcoming Medicare regulation has hit a wall.
The probe involves an April 1 alert from Height Securities, an investment research firm that specializes in federal regulatory data. The alert caused health insurance stocks to rise as much as 6 percent that day, as the Wall Street Journal detailed:
Height may indeed have done nothing wrong here. Still, the case illustrates how difficult Washington-based inside trading can be to prove, even if it does happen. There are so many potential sources of information in Washington that tracing back to the source can impossible. In a lot of instances, the information may not be nonpublic, just little-noticed.
