What is it? Insider trading. Why are they afraid of insider trading? Because it is prohibited by law and perpetrators go to jail.
So, to make bankers more accountable for their actions, better enforcement and jail penalties would do marvels. But somehow this does not happen.
There is more. Some insider trading is actually legal. How does it work? When new economic data are released, they often provide new information and markets move (you may have seen the movie "Trading Places". In this movie the information is the release of an estimate of the Florida orange crop; money is made by trading in frozen orange juice futures).
To allow everyone to have the same information, institutions (both private and public) that release data have a "lockup" period: data are announced to everyone publicly at a predetermined hour.
But in fact not everybody gets the information at the same time. High-frequency traders - firms that trade stocks very often with the help of computer algorithms, get it earlier. How? They pay the stock exchange for a direct line to their information system. This allows them to get information up to 50 nanoseconds before others. They can conduct trades in under 20 nanoseconds. So they can trade on the new information before others get it.
The definition of insider trading: trading using info not publicly available. Indeed, this is what is happening.
Who benefits:
1. High frequency trading firms
2. Stock exchanges that get paid for direct access.
And somehow it is legal. Beats me.
You can read about another example here
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