The True Cost of Insider Trading: The Case of Interactive Brokers

The recent flurry of mergers and acquisitions have led to a lot of suspicious trading ahead of announced deals. Most notable was the couple busted for buying a boatload of shares of Dow Jones Co. (DJ) ahead of Rupert Murdoch and News Corp.'s (NWS) takeover offer of the financial media giant.

Though there has been plenty of insider trading headlines splashed on the front of financial sites, what hasn't been covered is how the impact of unethical and illegal trading is much more far reaching than some would think. The stock market is a zero-sum game; and thus one participant's gain is someone else's loss.

Take for example electronic options broker Interactive Brokers Inc. (IBKR). It was a hot issue back in May and raised $1.2 billion in its initial public offering, but there's been some tough sledding recently as the company just reported preliminary second quarter earnings that were disappointing. However, earnings would have been in line with what the two analysts that cover the company were expecting, but thanks to a $37 million options trading loss stemming from manipulated trading of Germany's Altana AG on the Deutsche Boers, earnings came in below their estimates.

What happened is that in the name of making a market and providing liquidity, Interactive ended up on the wrong side of the trade and paid dearly after there was an unexpected move in the stock. Shareholders and average joe investors probably won't feel the pinch this time because Interactive CEO Peterffy (who owns 85% of the company) will cover the hit. But in many cases, shareholders aren't so lucky and are usually left footing the bill.

Comments

[Ezzyme]

Stocks are not a zero sum gain, options are.