Back in the early 1990s, soon after the authorities introduced the so-called ring of steel round the City of London (using plastic bollards) a rumour swept some of the City’s racier dealing rooms: all public pay-phones in the Square Mile were being monitored by anti-terror police.
It was probably true. The security precautions were against the IRA, which was threatening at the time to bring London’s financial district to a halt; one terror ploy was to leave a truck full of explosive next to an office block and then issue a warning from a nearby pay-phone. But those public phones more commonly saw a different type of traffic - tips and whispers that, to an over-zealous ear, might even sound like insider trading information.
The effect was immediate. Across the City scores (if not hundreds) of traders immediately bought new-fangled mobile phones so as to continue their more sensitive telephone conversations in private. Public pay-phones were not worth the risk. Sooner or latter the police would get bored listening for terrorists and would keep an ear out for insider tips instead.
And so it has continued ever since. Each and every move to tighten surveillance has been met with a fresh reactive move to more private technology. Mobiles, pay-as-you-go SIMs, webmail, instant messaging, Facebook, Blackberry messaging….
Perhaps foursquare.com will prove to be the next social tool adopted for anti-social financial business.
Either way — despite the huge publicity surrounding the arrest of Raj Rajaratnam and friends — we should not expect any sustained drop off in insider activity. Those involved will simply take better precautions - or at least endeavour not to be as sloppy as the alleged Galleon ring has been shown to be in the partial phone-tap extracts published by the Southern District court of New York.
Because as much as technology makes the job of chasing insiders more glamorous, it also makes the transfer and possession of inside information infinitely more possible. And if the current tech does fail, then there is always this to fall back on.
Rawson Adams at Capital Chronicle notes that in the Rajaratnam case, the US authorities have taken a leaf from the syllabus of the Genghis Khan School of Market Administration:
…blind all but one in the village and send the mono-eyed survivor down the road to the next settlement with the news.
He suggests that in the UK the FSA might take the same approach, erasing its limp history and perhaps saving its own institutional skin in the process; the prospective Tory government has threatened to all but abolish the regulator.
Indeed, there is already anecdotal evidence that the British authorities now taking much more aggressive action: the subject of one current investigation says his entire garden was recently dug up by police, looking for a stash of cash, Sopranos-style.
In the US, meanwhile, Bloomberg was reporting that Wall Street should now brace for much wider regulatory action:
The pending crackdown, based on at least two years of investigation, targets securities professionals including hedge- fund managers, lawyers and other Wall Street players, the people said, declining to be identified because the cases aren’t public. Some probes, like the one focused on Rajaratnam, rely on wiretaps. Others stem from a secret Securities and Exchange Commission data-mining project set up to pinpoint clusters of people who make similar well-timed stock investments.
For the record, market supervisors on both sides of the Atlantic have been combing data for “clusters” of activity for at least two decades.
Where precisely has that got us to date? Nowhere.
Related links:
Rajaratnam and the spread of inside information - John Gapper’s blog
Rajaratnam’s ‘unusual activity’ in Hilton shares led to charges - FT
