In the summer of 2016, after months of speculation, the Feds finally ended their investigation into potential market manipulation in the stock market. The Feds closed the investigation without charging anyone – a big win for the economy and everyone that had faith in the system.
But the win wasn’t perfect. The Fed had to close the doors of their inquiry and leave town without fully understanding the state of the cryptocurrency markets. It was only after the markets closed on August 31st that they found out what Paul was betting against – and the fact that most of his wagers were winners!
On August 31st, just before the market closed, an analyst at the Federal Reserve Bank of New York released a report stating that the majority of the stocks in the S&P 500 had been marked down, indicating ‘fear’ in the market. This came as a complete shock to the investing world because it was widely believed that the S&P 500 is mostly made up of strong, well-known brands that are virtually impossible to manipulate. The fact that many stocks fell so sharply, just before the close of the market, shows that something significant was happening – and it wasn’t good.
Why Was The Federal Reserve Bank of New York Investigating Market Manipulation In The First Place?
The Federal Reserve Bank of New York (FRBNY), part of the US Federal Reserve System, was formed way back in 1912. Its purpose is to serve as a central bank for the entire US. Today, it’s the largest financial institution in the world by market capitalization.
Like other central banks, FRBNY has two main mandates: promoting economic stability and reducing the risk of financial collapse. To carry out these mandates, it monitors the financial system for signs of stress and cracks that could lead to collapse.
In July 2016, the New York Fed’s general counsel, Harvey Goldsmith, was appointed to head a special task force to investigate market manipulation. This followed an unprecedented surge in insider trading that saw the price of a Tesla stock rise by 41% in just 6 hours, following a series of tweets from the CEO about an upcoming product launch. Investigations into corporate fraud and market manipulation ensue.
Insider trading, or trading based on confidential information, emerged as a significant problem in the financial markets during the credit crisis of 2007-2008. As the global economy struggled to recover, traders used inside information to gain an unfair advantage – and the practice made a lot of people very rich indeed. But it also brought the practice into the spotlight and caused significant legal, regulatory, and social turmoil. It was during this time that one of the main causes of the credit crisis was identified: banks were providing loans to people who didn’t qualify for them based on risky real-estate investments and other dubious activities. If you’re looking for a way to make quick money, the housing market is a goldmine.
Insider trading first came under the spotlight in the latter part of the 20th century, during the height of the equity boom. It wasn’t a significant issue until the early 21st century, when technologies like dark pools, high frequency trading, and social media made it much easier to gain and share insider information. Since then, numerous cases of corporate fraud and market manipulation have been uncovered, resulting in jail sentences for some of the defendants. But the legal issues surrounding insider trading continue to be a point of contention – and for good reason. If an investor has knowledge that can help them make better investment decisions, then why should they be prevented from using that information to gain an edge in the market?
What Were The Major Points Of Confusion Or Doubt That The Federal Reserve Bank Of New York Had To Resolve?
The New York Fed identified a number of issues that it had to resolve before it could close its investigation into potential market manipulation. These were:
- the definition of ‘inside information’
- how to identify suspicious activity
- whether to extend the investigation to include cryptocurrency
- how to effectively investigate a market crash
- what impact, if any, the investigation had on the market for luxury goods
- whether the practice of market manipulation exists in the cryptocurrency markets
- if it does, what impact it has
- and much more…
As can be seen, this was a pretty tall order, especially since the New York Fed was taking on one of the most significant institutions in the country, and one of the most important financial markets, in general. So without further ado, here’s a breakdown of the key issues that the New York Fed had to resolve in order to bring the investigation to a close:
What Is The Definition Of Inside Information?
One of the first issues that the New York Fed had to resolve was the definition of ‘inside information’. This is information that a reliable source has provided about an event or company that is material to an understanding of that event or company.
In its investigation, the New York Fed identified three categories of insider information: tips, proposals, and inside market information – and distinguished them from non-public information and publicly available information. As the name implies, ‘tips’ are unconfirmed tips or leads about an event or company that are passed on to a third party from an individual or organization that has confidential communication with the subject of the tip.
“Proposals” are formal suggestions or requests for action that are made confidentially to a few people. Companies, governments, and other organizations often keep proposals confidential to avoid alerting competitors – and later, when the proposal is implemented, to avoid admitting to what extent it was influenced by the original offeror.
Finally, “[i]nside market information” is confidential information about a company’s or an industry’s prices, earnings, sales plans, or other trading-related information that is used for buying or selling financial instruments.
The issue of insider information is a complex one. Historically, it has been defined as information that is not available to the general public. But today, that is certainly not the case. Thanks to the massive increase in interconnectivity that we’ve seen over the past decade, people have immediate access to a wide range of information about anything that they could possibly want or need – and that includes what happened in the past, what is going to happen in the future, and even what is being said or done by individuals, groups, or companies.
In the eyes of financial regulators and law enforcement, insider information often stands for secret or prohibited information. However, for the average person reading about the subject online or in the paper, the line between what is in the public domain and what is secret is fading.
The New York Fed made the right decision in differentiating between public and non-public information. By bringing an end to this aspect of its investigation, it enables the public, companies, and even other regulators to move forward confident that they know what information is public, what information is proprietary, and what is gray area.
How Can The General Public Confirm Or Dispute The Findings Of The New York Fed?
Even though it is commendable that the New York Fed brought an end to its investigation into potential market manipulation, that does not mean that its findings are unquestionably correct. For the sake of justice and transparency, the public deserves to have serious doubts cast upon the accuracy of the New York Fed’s conclusions. As the largest and most influential financial institution in the country, the New York Fed has the ability to seriously undermine the validity of its claims. But that would require some effort on the part of the public to prove that the investigation was, in fact, rigged. That is certainly possible, given the right set of evidence. Unfortunately for the average person, this evidence is scattered around in various places, making it extremely difficult to reconstruct.
One of the first places that they could start is with the public sources that the New York Fed used to support its claims. It is understandable that they would look to the Federal Reserve for guidance and support – given its vast experience in banking, finance, and economics – but that institution, too, has a lot to account for.