Asymmetric Information: The A.I. Broligarchs Hope Will Save Them From Overconfidence In A.I.

In brief: It won't.

Though the Supreme Court offered a definition of, and prescription against, insider trading as early as 1909, the definition was so narrow that it actually emboldened market manipulators. By the 1920s there was a school of whale traders who specialized in the syndical manipulation of what then passed for tech stocks - most famously, RCA - driving up prices by orchestrated buying sprees, then selling off in unison to unsuspecting amateurs trying to buy the rise the whales had promoted (sometimes by bribing newspapermen to plug the boom stock in their columns).

While variations of syndical manipulation have always been part of organized finance, the speed of telecommunication, combined with the scale of the whale’s fortunes, made the swings of the ‘20s more volatile than ever before until, in October of 1929, the market crashed, and no amount of frenzied buying by the whales could make it rebound.

Whether or not this crash caused the Great Depression on its own, public recrimination of the financiers was fervent and grew more fervent as the depression worsened. The taboo against insider trading now extended to syndical manipulation, and many of the financial guardrails constructed as part of the New Deal were designed to discourage market manipulation and (if necessary) enforce more strident regulations.

The threat of enforcement, however, has always been more effective than the enforcement itself. Though there are numerous impediments to prosecution of financial crime, some of which have been quite purposefully erected by neoliberal regulators, the challenge of discriminating what constitutes “material, nonpublic information” is persistent.

As Fischer Black details in one of my favorite papers on the subject, simply titled “Noise,” there is never such a thing as information equilibrium. Market participants are always working with discrepant advantages in terms of both their access to relevant information and their ability to distinguish it from “noise.” Many a strong legal defense can be mounted on the basis that offending traders were too ignorant to know they were breaking the law.

But the threat of enforcement is very powerful and, as we are now seeing, very necessary. With regulatory agencies defanged by kleptocratic administrators, non-intervention policies, and aggressive staff reductions, the message to markets is very clear: anything goes.

Not only does the Street now know that nobody’s watching them, they know that nobody’s watching the watchers. Those who have direct access to government officials at the highest level can trade on the information that access gives them, can perhaps even dictate government actions which have profound and dramatic impacts on the market. Those who lack such direct access will start imitating the trading behavior of those whales who they believe do, a dynamic which gives those whales the capacity to manipulate markets even when they don’t have insider information.

This will not end well. The state of confidence cannot hold up under such conditions.