The Revenge of NANC and KRUZ

Eakinomics: The Revenge of NANC and KRUZ Americans hate it when the playing field is not level, especially when it involves politicians. And Yahoo Finance reports real suspicion about the trading prowess of elected officials. “Famous examples include Paul Pelosi, husband of Nancy, the Democrat[ic] speaker of the House, and Richard Burr, a Republican senator. Some suspect their success is not solely attributable to their trading talents. An investigation by the New York Times...found that between 2019 and 2021 a third of congresspeople reported trades by themselves or a close family member—and half of these sat on committees where they might have gleaned pertinent information.” That doesn’t mean Congress will do anything about it. Among the detritus left when Congress beat a hasty exit to campaign for the midterm elections was the promise to ban stock trading by government officials, especially members of Congress. There are lots of reasons to be skeptical of such a move, including the awkward fact that this problem has been “solved” before – namely with 2012’s STOCK Act (Stop Trading on Congressional Knowledge Act). But in a revenge of the traders action, Subversive Capital announced it will start two new exchange traded funds (ETFs) named NANC and KRUZ. No, this is not a 2020s reprise of Franz and Hans. NANC will mimic the trades of congressional Democrats, while KRUZ will track Republican trades. The charm of this subversion aside, will this solve the problem? Well, first of all, what is the problem? It is not that politicians trading based on their knowledge of the legislative process affect stock prices. As a general matter, one wants stock prices to reflect as much information about the outlook as possible. If Congress is going to pass something pathetically stupid that will harm pharmaceutical innovation, the share prices of those companies should reflect it. If Congress is going to shovel tens of billions of taxpayer dollars to semiconductor manufacturers and accomplish nothing, stock prices should reflect that. Eakinomics could go on, but you get the point. From an efficiency point of view, stock prices should include a summary of all the future implications of legislation, bad or (occasionally) good. No, the problem is one of fairness. If you get the information first, you can buy or sell (as appropriate) first and benefit first and most. Not cool. NANC and KRUZ would make it so that the moment a congressional trade occurs, the ETF will mimic the trade and the same values would be transferred to the shareholders of the ETFs. One can hear the voters chanting: “Payback is getting rich!!” Maybe. There are two problems with the theory. First, under the STOCK Act, trades have to be reported within 45 days. Only with the same information at the same time is the playing field truly level. Second, it may be that the ETFs are targeting the wrong crowd. As Yahoo Finance also reports, “It is not clear that politicians actually do all that well. Recent work by researchers at Dartmouth College finds no evidence of superior returns from 2012 to 2020. Politicians’ picks underperform the markets by 0.3% over a six-month period.” NANC and KRUZ may or may not be a good idea – the market will adjudicate this in the weeks and months to come. But they only solve the fairness problem if they are real-time ETFs. And the empirical evidence suggests that real-time trading inspired by Congress will impair the efficiency of outcomes. Oh well, maybe there will at least be a video.