The recent Wall Street Journal Business and Investing piece ('Certain Biotech Investors Get An Edge', April 16, p. B12) was an eye opener for many but perhaps not in the way they wanted. According to the article:
"Publicly traded biotech companies are turning to PIPEs or 'private investments in public equities' to help them get through a volatile period in equity markets. In the first quarter U.S. biotechs raised a record $5.7 billion using this approach."
What's not to like? Well, the small fry average biotech investors are not happy. While it's a "cost effective way for experienced investors to raise money while avoiding the choppier public markets" it is less of a blessing for average shareholders of those companies which benefit. As the WSJ notes:
"The problem is that the PIPE boom is leaving out many investors, some of whom complain that it is essentially a form of legal insider trading. This is because many PIPEs give a select group access to nonpublic information such as data from a cancer study that is about to be published. Once the deal is locked up PIPEs are announced to the public often alongside the information leading to major share gains."
According to Daphne Zohar, founder and CEO at one biopharmaceutical company:
"These deals make generalist investors feel like the deck is stacked against them."
But let's be clear it isn't like exclusive access to PIPEs is the first iteration of this form of shadow gaming. In my 2011 book,
The Elements of the Corporatocracy: Stahl, Philip A.: Amazon.com: Books
I noted The London Financial Times article (‘A Metaphorical Proposal’, Mar. 13, p. 11A) by Michael Skapinker. He cited remarks by Joseph Berardino – chief exec of Arthur Andersen- who noted how the current reporting system “fails to communicate essential information about the real risks facing companies” to the small investor. Result? The small fry "generalist' investor gets hosed, the big fish gets rich off the small fry's ignorance.
Lewis emphasized the flash traders often traded on fractional share values but these inevitably pile up. Billions could be made off the backs of poor ordinary day traders, who trusted that when they placed their buy or sell orders no shenanigans or secret advantages were afoot. But alas, this wasn't the case. It only took a tiny fraction of a second of a flash trader's advantage (i.e. or "latency") for them to see slightly ahead - to what you're intention is - and do it before you do.
So yes, in a real way, these built-in aspects of capital markets amount to legal ways to hose the small guys. Should you be alarmed? Maybe, only if you have money - like approaching retirement - you can't afford to lose. Otherwise just be aware of the pitfalls and how the game is stacked. In the case of the PIPEs it's especially the way access to the inside info is "extremely limited." If you're not among the "two dozen or so controlling the vast majority of the deal flow" well you're out of luck.
Then there is another concern (ibid.):
"While there are strict rules around the information shared in PIPES, these deals could be leading to what is known as shadow insider trading - a pervasive problem in biotech whereby an investor learns information about Company A and then uses it to make an investment in Company B".
More reasons why wifey and I don't gamble in the Wall Street casino at all, opting for the slow and steady gains via money markets and the stable (monthly) income accruing from our immediate fixed annuities.
See Also:
Bringing The Stock Market Back In Synch With Main Street: It CAN Be Done But A Price Will Be Paid
And:
And:
The 'Game Stop' Speculative Frenzy And The Emerging Stock Bubble - What's Behind Them?
And:
And:
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