I recently listened to Ira Lee Sorkin, this guy was Bernard Madoff’s lawyer, and he sure can tell a story! Those old lawyer have a way with words.
Anyways, he talked about the history of insider information trading and fraud schemes practically from the beginning of his career and what I took from it is that the you have to establish gains to the one giving the information (even if it is just merely friendship) as well as some other breach of agreement between the owner of the information and the leaker. He also talked about the wolf from Wall Street and how controlling the float allows stock dumping, as well as on Ponzi scheme. The sentence “unfair advantage” was never mentioned in the presentation and this led me thinking about the following:
- Let’s say I have devised an AI predictor for a certain stock or commodity with low liquidity. This predictor is forecasting the stock movement with probability of let’s say 60%.
- Now I publish my forecasts anonymously for free to a trading forum, and with time people will start to follow them since it allows for profit over simple gambling.
- The fact that I will have a growing crowd of followers will do two things – One is that I will have control over the virtual float (I will not own the stock but I can control its movement). The second is that this mechanism has positive feedback loop, the more people believe in the prediction then more the prediction will be true.
- Now, all one has to do is to reverse the prediction once in a while and go against the market. Since the prediction is generating reality one can earn from phase shifting, I.e you sell just short it before the price reduction due to the prediction.
In the last part of his talk, Ira talked about the lack of resource that regulatory agencies suffer from with regard to the amount of data and the fact that it’s hard to identify fraud in such a large scope.
On this I beg to differ – Google and facebook are doing quite nicely identifying trends and preferences at a larger scale. Here is a nice article on Fraud identification using Sergey’s Page Rank principle in Fraud detection. It’s perfectly possible just not feasible.
