The story of the Ukrainian stock market hackers is a riveting blend of Wall Street chicanery, high-tech criminality, and Boris-and-Natasha-like Eastern European deviousness. It also teaches investors a lesson, which I’ll get to in a minute.
The story grabbed my attention from the start because it involved a business that rarely gets attention: the companies that distribute press releases. I worked for one of those companies, PRNewswire, many years ago, so I’m familiar with what they do and the peculiar niche they occupy at the meeting point of journalism and finance.
What Newswires Do
The three major companies in the business — Business Wire, owned by Warren Buffett’s Berkshire Hathaway; PRNewswire, owned by UBM Plc, a British media company; and GlobeNewswire, part of Nasdaq — allow companies issuing press releases to simultaneously distribute a release to major news outlets including Dow Jones, Reuters, The New York Times, and the Associated Press.
Doing that fulfills the disclosure requirements of the Securities and Exchange Commission, which doesn’t mandate the use of the distribution companies, but states that companies should make material corporate announcements available to the marketplace simultaneously so that no one is disadvantaged by someone else getting the news first.
In the days before the newswires, companies would create multiple copies of their earnings releases and place them in sealed envelopes to be hand-delivered by messengers to the major news organizations in New York precisely at the appointed hour. The newswires eliminated the human messengers.
By the time I got to PRNewswire, it and its competitors had branched out to delivering more than earnings releases, though financial news remained the gold mine. When the private owner of rival Business Wire wanted to retire and cash out, Warren Buffett seized the opportunity and bought it; no dummy he, since the Oracle of Omaha saw the value in a business that enjoyed the closest thing possible to a government mandate for its use.
The newswires have always taken confidentiality very seriously; but 20 years ago when I worked at PRNewswire, I don’t think anyone gave too much thought to someone hacking into our computers. I’m sure the news release companies have devoted considerable resources to cybersecurity since then (and much more recently), and it’s been clear that all the newswire companies helped the government in its efforts and are totally innocent of any wrongdoing.
For investors, the incident underscores the most important takeaway that someone who has been observing markets for years and who has worked at the New York Stock Exchange can give you: trading is costly at best and dangerous at worst even for market professionals. So since you’re an investor, not a professional trader, steer clear of the market.
Scandals and scams involving stock trading will never go away, no matter how vigilant an SEC stands on guard. What’s more, the entire market is “rigged” in the sense that those at the core of the trading mechanism profit from everyone else’s ignorance.
In his recent best-seller, Flash Boys: A Wall Street Revolt, Michael Lewis shows how high-frequency traders are doing the rigging. In the past, earlier generations of market insiders — whether it was floor specialists in the hey-day of the New York Stock Exchange or market-makers in the pre-automation days of Nasdaq trading — were profiting from the action.
The Bottom Line
Since we need markets that work, and since eliminating the insiders would kill the markets, there’s only one way to keep market participants from gouging you — trade very, very infrequently.That means:
- Ignore all temptation to trade on hot tips, sudden flashes of insight, or news that you think no one else knows. Wait a while. If it’s such a great deal, a few days or weeks won’t matter.
- Trading is a way to make Wall Street richer, not you. Commissions, even of the discount variety, can be costly if you wind up losing principal — which study after study has shown is what happens to frequent traders. The cheapest trade is no trade at all.
- IPOs are sexy, but they usually indicate the market is frothy and that insiders are cashing out. Also, ordinary investors can’t get in on the good ones. Again, wait.
- Don’t buy a closed-end fund until it trades at a discount and everybody thinks it’s a loser.
- Buy good dividend-paying stocks. Ignore news reports. Keep the stocks for years.
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