President's Blog

A Discussion on Insider Trading

April 11, 2011
post contributed by Megan Flynn

Members were given a rare opportunity to participate in an informal and open discussion with the Regional Director of the New York Office of the SEC last week. George Canellos shared his professional and personal insights with the Roundtable regarding current regulatory issues in the hedge fund industry.

Canellos briefed those in attendance on a few select historical cases of insider trading and brought the ideas into the present technological age. The Roundtable discussed current practices and the difficulties the SEC faces with accelerated technological growth. This technology at the disposal of savvy traders has given more individuals access to more information faster, and has brought sectors of the industry to places originally unintended.

Most insider trading cases were previously viewed through a long term, buy and hold lens. This is no longer the case as people today are more incentivized to look for more nuanced information and exploit it for profit, Canellos said.

A majority of what is prosecutable is based on it being material to a normal or reasonable investor and what is material has changed in the last few years. A price fluctuation of $0.01 would not have been considered a significant material change in the market years ago, however today's investors, especially hedge funds, are poised to make great profits from these very small market fluctuations.

The business model of expert networks was discussed as well as the prosecutable entities with which some of them have transformed into. As the business actions of the expert networks became more divorced from the business model, the practice started to evolve into disaster, Canellos said, and Regulation Fair Disclosure has now made the breech of fiduciary duty within expert networks easier to prosecute.

Towards the end of the event, a member of the roundtable prefaced his question by thanking Canellos for dedicating his morning to the Roundtable and offing more transparency to the community. The New York Hedge Fund Roundtable proved to be the perfect venue to hold this timely discussion.

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