Fed Turns up the Heat on Wall Street

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By: Rob Schulz, CFP®
November 24, 2010

You may have noticed the headlines as the Securities Exchange Commission, FBI, and federal prosecutors wrap up what they call the largest insider trading criminal investigation in history. Several Wall Street firms, along with a highly pedigreed list of hedge fund managers, have been implicated as the case moves swiftly into the indictment phase.

Here are some of my thoughts:

1. I support the government’s aggressive efforts to stem the use of non-public information by privileged managers and firms to gain an unfair advantage in the stock market. Stocks trade on the assumption that the market is regulated and fair. As we emerge from the most recent economic downturn, it is important to restore public faith and confidence.

2. The alleged prevalent use of insider trading by some of Wall Street’s most successful institutional and hedge fund managers is further proof of the stock market’s incredible efficiency. Many targets of the probe “are already among the most advantaged, privileged, and wealthy insiders in modern finance¹”. These prominent folks have a lot to lose if these allegations prove out. Therefore; they must know it is impossible to consistently beat the indexes and justify their high fees without cheating. Why else would they risk jail?

3. You can add this to my growing list of reasons why I prefer not to use managed funds. Eugene Fama’s Efficient Markets Theory basically states that the price of a stock represents all known future outcomes. If this is true, then the only thing that can change a stock’s price is new information. Even if insider trading was completely eliminated, we cannot reasonably expect to be able to react quickly enough to new information and gain any advantage over other investors.

4. My passive asset allocation strategies do not rely at all on timing or aggressive asset managers with expensive teams of analysts. I do not believe they are worth the money they charge. I prefer to rely on the results of volumes of academic research that point to proper asset allocation strategies at a minimal cost as the best course for long term growth.

Have a Happy Thanksgiving! As Americans we have so much to be thankful for. A wide majority of the inhabitants of this world do not have any means by which to invest for tomorrow. We are truly fortunate!


¹ U.S. Attorney Preet Bharara, “Feds turn up heat on Wall St., raid 3 hedge funds” by Daniel Wagner and Larry Neumeister, Associated Press, On Tuesday November 23, 2010, 2:23 pm EST

Rob Schulz, CFP® is a Principal with First Texas Financial Services, Corp., and a Registered Representative through Cambridge Investment Research, Inc., a Broker/Dealer, Member FINRA/SIPC. He is also an Investment Advisor Representative through Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Cambridge and FTFS are not affiliated. These are the views of Rob Schulz and not those of Cambridge, FTFS, or any of their affiliates.

By Rob Schulz