Finally, the insider trading trial of the century is over. Raj Rajaratnam was found guilty on all counts and he is looking at 15-20 years in prison. Now you may say what does this have to do with order flow trading? It has a lot to do with order flow trading and the human inefficiencies and behaviors that are prevelant across the markets and society.
You’d think that someone who is worth $1 Billion dollars would be wise enough not to insider trade for a measly $64 million dollars spread over several years. After all, he could of just stuck his money in bonds and gotten 5% a year (Of course there is the potential he got away with more than $64 million). He could of gotten $50 million a year without the risk of jail time. But sometimes there are market participants for whom greed and corruption blind them from all levels of rationality and logic.
This cuts right to the problems with human behavior. People are inefficient. They do not always make rational decisions all the time. Sometimes people make rational decisions some of the time. Others make rational decisions a majority of the time. Others make rational decisions a very low portion of the time.
But what is 100% true, is that not all market participants will make perfect decisions 100% of the time. This leads to inefficiencies in the markets and you end up getting exploding volatility and huge moves in the financial markets as the people who were inefficient are forced to adjust their positions or liquidate them as they may have finally figured out they were wrong – after the pain of losses gets to them.
You’d think that if Raj was going to insider trade and risk jail time, he would of done it for some big money and not such a small amount. But again people are inefficient. Some are stupid. Others are stupid and corrupt at the same time.
If only Raj Rajaratnam, knew about order flow trading, he wouldn’t need to engage in insider trading, as order flow trading offers some of the largest, sustainable, legal, and ethical edges in the financial markets.
Many traders can become greedy in the markets are various points. I am sure there were a ton of greedy people who bought silver above $49.00. There were also many people who bought EUR/USD above 1.4900. They were playing the greater fool game, hoping to find a greater fool willing to pay a higher price to sell their positions to in the future. Now there is nothing wrong with playing the greater fool game, so long as you have strong risk controls and can take a small loss. But there were plenty of traders both big and small who were playing that game and had no concept of position sizing, stop losses, trailing stops, or order flow. Some of them were pyramiding upwards, adding more and more contracts until the house of cards collapsed, resulting in substantial losses. They had no rules for knowing when the game was up and when they should stay out of the greater fool game.
Inefficiencies exist, every day, every week, every month, every year. You just need to attain the mindset, and know the strategies for locating them. Then you can harness the volatility of the markets to your favor. If only Raj Rajaratnam, knew about order flow trading, he wouldn’t need to engage in insider trading, as order flow trading offers some of the largest, sustainable, legal, and ethical edges in the financial markets.
**Update** A good book chronicling Raj Rajaratnam has been released called: The Billionaire’s Apprentice: The Rise of the Indian-American Elite and The Fall of the Galleon Hedge Fund