Other than the fact that they have millions of saunas and over
188,000 lakes, what is there to know about Finland? Well for one,
through researching the Nasdaq OMX Helsinki Exchange, a couple of
social scientists found a way to track previously unseen illegal
In America, the Securities and Exchange Commission (SEC) has
really cracked down on illegal insider trading by making several
high-profile arrests and launching some rather extensive
investigations. Now three social scientists have decided to look
into a solution to illegal insider trading.
Henk Berkman at the University of Auckland, Paul Koch at the
University of Kansas and Joakim Westerholm at the University of
Sydney have released a new study accepted for publication in the
Journal of Finance where they have uncovered a new way to spot
The men researched over half a million stock market accounts in
Finland from 1995 to 2010 on the Helsinki Exchange. The
researchers chose Finland because it offered them unusual and
extensive access to information about trades as well as
information about individual investors.
The researchers looked at the information in many different ways
including investors' personal information like their age. As the
researchers were analyzing the data according to the age of the
investor they found that the accounts belonging to young children
did astonishingly better than any other age group.
"We were very surprised when we first found this evidence," Paul
Koch said. "Again, we were not looking for the result we found.
The group [of accounts belonging to children between the ages of
zero and 10 years old] seemed to outperform all the others."
Clearly Koch isn't saying that a bunch of toddlers know how to
make the right picks in the stock market, but their parents do.
The people who operated these children's accounts were their
parents and guardians.
Koch went on to report, "We find that underage account holders
exhibit superior stock-picking skills on both the buy side and
the sell side over the days immediately following trades.
Accounts belonging to children (and managed by their guardians)
appeared to be especially prescient when it came to major company
events such as merger or takeover announcements."
Typically when a company announces a takeover or merger it
typically initiates a large fluctuation in the stock market
prices. The researchers discovered that the adults made the right
decision about 50% of the time before a takeover announcement.
But in an unexpected discovery, the researchers found that the
accounts belonging to the children made the correct decision in
buying and selling 72% of the time after takeover announcements.
(They noted that this isn't 12% per year; it's 12% per day.) As
the researchers furthered their investigation they found that the
parents of these children didn't do nearly as well in their own
"Guardians are willing to trade on behalf of their children to
earn these extraordinary returns, but they are reticent to trade
through their own account," Koch says. "One reason would be a
fear of getting caught breaking an insider-trading law."
Koch went on to explain that the results implied that regulators
like the SEC who want to track insider trading might pay
attention to successful accounts belonging to children.
When Koch was asked whether his findings from Finland were
applicable to U.S. insider trading cases, he said that they were.
Koch explained that the information would not be as easy to
access as it was in Finland but that the SEC definitely has
access to the information.
To listen to Paul Koch's entire interview with Shankar
Vedantam on NPR, click here.
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