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Stop the Presses

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There is nothing the press likes more than a story about the press, so the biggest news in England last week was the release of the Leveson report on the media and its relation to politics and power in the UK. Every major paper lead with the story and some went so far as to carry special supplements to report on the report, as it were. You'd have thought Princess Di had been reanimated and played strip pool with her sons for all the coverage.

The report itself recommends that the mainstream print media be regulated by an independent body created by Parliament. The finding is controversial because it potentially threatens freedom of the press. Lord Justice Leveson, who wrote the report in response to the phone hacking scandal, essentially found that given the power of the press, they simply have to act more responsibly than they have under self-regulation.

You can guess how the press feels about this, but the idea of standards for mainstream media is appealing to me. Not necessarily to ward off the dangers of phone hacking, but because I have a disease -- a disease that causes me to read the WSJ and then react with a tantrum whenever I read something that is absurd. Given the up-and-down content of the Journal I am in a near constant state of dyspepsia.

We don't have to go far to find examples. In this weekend's WSJ there was an article on MLPs -- publicly traded domestic energy partnerships that pay out much of their cash flow to investors and enjoy certain tax advantages. The article left unchallenged a money manager's claim that he does well buying ETFs (exchange traded funds) of MLPs rather than individual MLPs. The reality is the money manager is terribly derelict in his duties since the ETF charges nearly 1 percent in annual fees and disallows the tax breaks investors receive when buying the MLPs individually. Isn't the money manager there to do exactly the opposite, to make sure investors receive all the credits available and pay as few unnecessary fees as possible? The idea that anyone is well served by buying the MLP ETF let alone by investing with a money manager that will charge him additional fees for the privilege is risible (unless you are the money manager, who is also enjoying free advertising courtesy of the WSJ).

Elsewhere in that day's paper is Holman Jenkin's column.

He writes informatively and well on telecoms and other technical sectors -- or so I think: I don't have any direct experience in those sectors myself, so don't know for certain if what he writes is true. But when he writes about what I do for a living -- trading -- I know he is wrong. For the third or fourth time since the guilty verdicts in the Raj Rajaratnam insider trading case, he has written that insider trading is a victimless crime, one in which all parties are unaffected by insider activity.

He is incontrovertibly and demonstrably incorrect.

Jenkins cites the recent case in the news where a hedge fund trader at SAC saved his company approximately $275 million by exiting a long position once he obtained inside information from a doctor that clinical trials for an Alzheimer's drug were going poorly. Once the trial news became public, i.e., after SAC had sold, the stock dropped 70 percent. Jenkins has valid points when he notes that it's hard for industrious traders doing diligent research to know for sure where the line is that separates good work from criminal work. But he is factually wrong when he writes that the buyers would have bought the stock anyway, whether SAC was selling or not. However many shares SAC sold is exactly the number of shares now owned by the rest of the market that they wouldn't have owned if SAC hadn't sold. It's a zero sum game, shares are neither created nor destroyed and if SAC still owns them, someone(s) else doesn't. And as much money as SAC saved or made by selling those shares ($275 million in this case), it's exactly the amount lost by others -- money they wouldn't have lost if SAC hadn't acted. We may not know the exact name of the victim, and in fact there may be many victims, but that doesn't mean they don't exist.

We can't blame Jenkins; he is not a trader so perhaps he shouldn't know better, but we can blame the WSJ for allowing such fallacious content. And we should care about this beyond my dyspepsia because papers like the Journal not only shape opinion, they shape legislation. And if you think the public has abandoned the equity market due to the phantom threat of electronic market making, wait until you see what they do when they regularly get creamed if insider trading is made legal. Jenkin's article is titled "The High Cost of Ignorant Stock Prices." How high is the cost of ignorant journalism?