New York – An interesting post by Roger Ehrenberg at Information Arbitrage analyzes where to draw the line on fairness vs. efficiency when it comes to information used by professional investors:
As it relates to the research process, I think fairness should be judged by whether a motivated investor could learn the information through resourcefulness and hard work. If an investor was focused on better understanding the prospects for a particular product, could they read published research, explore primary sources and perform surveys? Sure. Would it be difficult? Absolutely. But it could be done if the individual was sufficiently motivated. Alternatively, they could obtain this information by paying money for it via an expert network. Is it “fair” that someone has the resources to pay for access to experts where another might not? I think so. Those who have built careers around investing and are willing and able to spend money to streamline their investment process are ok with me – provided that the information to which they have access could be obtained by a highly motivated person. What isn’t fair, however, is when experts provide information that couldn’t be obtained through any amount of hard work, e.g., if an official at the FDA was on an expert network panel and had non-public information about the likelihood of a drug making it through clinical trials, sharing this information with a subscriber would unquestionably be unfair. Another example would be a company executive handicapping the prospects of an M&A deal. In these circumstances the recipient of the information would have the ability to trade on it, capturing the benefit between the current stock price and the target stock price reflecting the information they have received. Does this promote efficient markets? Yes. Does it support fair markets? Clearly not.
Ehrenberg also makes a reasonable forecast of what the consequence of the recent investigations may be for the expert network industry:
I believe the current set of cases being brought by the SEC will create a further stratification of the expert network marketplace. The behemoth – Gerson Lehrman Group – will consolidate and enhance their position due to their strong compliance culture and the time they’ve invested with the SEC in figuring out the appropriate business model. Smaller players, however, will be driven out by the costs associated with building and supporting the necessary compliance infrastructure, almost like a Sarbanes-Oxley standard for the expert industry. This will create a brighter line between what constitutes hard-to-obtain information and material non-public information.