NCPA - National Center for Policy Analysis

Savvy Investors Listen to Scientific Whispers

July 25, 2002

You can pass a law against insider trading, but how can you control investors' responses to inside scientific information?

For example, the Chicago Board Options Exchange is investigating "unusual trading activity" in options on shares of the Wyeth pharmaceutical firm, days before the release of a government study relating serious medical problems among women taking its hormone-replacement drug Prempro.

  • A system for embargoing important scientific and medical news has been in place for decades, but the frenetic search for an investing edge may have overtaken the limited safeguards intended to corral coverage by the lay press.
  • In addition, the number of people privy to special information has grown as more news outlets make medical stories a coverage staple.
  • Scientific publications circulate advance copies of crucial studies to hundreds or thousands of people -- including doctors, journalists and academics -- and there are plenty of mouths to whisper about findings that may affect a company's shares before those outside the loop get the word.

Experts say that insiders acting on advance medical or scientific information can make quite a haul. Moreover, there seems to be little that can be done to restrict the number of persons privy to such information under the present system.

Source: Peter Hensley, Peter A. McKay and David P. Hamilton, "Leaky Lid on Science News," Wall Street Journal, July 25, 2002.

For WSJ text (requires subscription)

http://online.wsj.com/article/0,,SB1027536603504975600,00.html

 

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