Politics Pays: Evidence of Insider Trading Among Congressmen


It’s funny — when we ran a quorum recently asking what should be done about insider trading, no one mentioned cracking down on Congress. Maybe they should have?

A new working paper from Feng Chi, an economics PhD. student  at the University of Toronto, is called “Insider Trading on K-Street: Are Politicians Informed Traders?” Here’s the abstract:

I investigate whether politicians take advantage of their privileged information that comes with their positions in power. Analyzing the trading records of Congressional members, I find that informed trades beat the market by 8.2%. As these gains accrue over the short term, my findings are suggestive of informed trading based on time-sensitive information.

And a couple of choice paragraphs:

Despite the potential for exploitation, Congressional members are generally free to invest in companies they help oversee. In addition, existing insider-trading laws do not apply to lawmakers. Probably to no one’s surprise, proposed bills to eliminate insider trading among Congressional members garnered little support on Capitol Hill. …

My research investigates whether members of Congress in fact make use of their information advantage. I identify informed trades based on committee memberships. As committees are intimately involved in the process of bill passage, committee membership provides a parsimonious link between a politician and any inside information that affects relevant industries.

Using their portfolio holdings, I find a 2% difference in returns between informed and uninformed stocks. Detailed analysis of their trading behavior reveals that value-weighted portfolios of informed trades outperform the market by 8.2% in the following month, while portfolios of uninformed trades yield negative abnormal returns. Furthermore, the gains accrue over a short horizon, indicative of time-sensitive insider information.

(HT: Nathan Yang)


Didn't Twain quip that Congress was the only certifiably criminal class in America?


Dubner, you didn't read your Monkeycage today!

"Alan Ziobrowski, James Boyd, Ping Cheng, and Brigitte Ziobrowski write:

A previous study suggests that U.S. Senators trade common stock with a substantial informational advantage compared to ordinary investors and even corporate insiders. We apply precisely the same methods to test for abnormal returns from the common stock investments of Members of the U.S. House of Representatives. We measure abnormal returns for more than 16,000 common stock transactions made by approximately 300 House delegates from 1985 to 2001. Consistent with the study of Senatorial trading activity, we find stocks purchased by Representatives also earn significant positive abnormal returns (albeit considerably smaller returns). A portfolio that mimics the purchases of House Members beats the market by 55 basis points per month (approximately 6% annually)."



You should be cautionary about the Toronto guy's results...this paper is better to cite because it's undergone peer review!



If you compare the reports carefully, Ziobrowski et al. don't actually show evidence that politicians are USING their inside information. In contrast, the Toronto researcher does.

Dan Inesanto

Wow, I am so very not surprised! Actually, I take that back - I would have thought the insider trading would have gotten them greater benefit than an 8% premium on return.

Insider trading by lawmakers ought to be outlawed, but I will certainly grant that it is an especially complex set of rules that would need to be put in place.


Overseeing that would be more burdensome than worthwhile. Maybe use technology so that all of their trades are public in real time. Then anyone who wanted to pay attention could also benefit.

Tyson F

I'm shocked...Shocked that the politicians didn't hide their trading records a bit better although I'm sure they don't really bother anymore

Cyril Morong

The Wahsington Post had an article on this in November 2009



Congressmen suing their insider info to make a few bucks in the stock market doesn’t seem like a big deal to me. (I’ve never really seen why insider trading was so bad anyway.)
The flip side is much scarier: Are congressmen making tax and regulatory decisions based on the benefits to their investments? My guess is that they are, and that’s why we need tighter rules on how lawmakers can invest.


Insider trading by lawmakers ought to be outlawed, but I will certainly grant that it is an especially complex set of rules that would need to be put in place.

How ‘bout: “Each trade by a federal elected or appointed official and her immediate family must be posted online with an escrow agent 36 hrs(?) before the trade is consummated”? The trade could list an offer price. “I propose to buy X number of common shares of Y Corp. provided the price per share is not above $Z.”

Of course, an official might use this gambit from time to time to manipulate the stock price of some favored or disfavored firm. For example, a West Virginia congressman might announce that he was going to buy more shares of the local coal company just before the company’s annual meeting. Alternatively, imagine if Congressional Democrats, frustrated with Dick Chaney’s antics, took turns announcing that they were selling all their shares of Halliburton. Sure, I expect the practice would be illegal – but hard to prove, and any prosecutor would have to be pretty gutsy to take on half of Congress.

In the long run I’d expect the market to catch onto these tricks. But the market can stay irrational longer than a firm can stay solvent.



Perhaps the best way to avoid insider trading by politicians is to not allow them to hold positions in the first place in investments where a conflict of interest may be present. Public companies that practice good governance will have a policy barring insiders from certain investments (owning direct competitors' shares, hedging company stock, etc). In addition, trading activity may be limited to open window periods that occur after material information is released to the public. Why not enact something similar for Congress?

(Other than the fact of course that this would require Congress to pass a law regulating itself - not likely unless a big enough scandal occurs to cause voter outrage)


Why not just have complete investment liquidation be a requirement of holding office? They must sell all of their investments before they take the oath of office. I'm not a tax lawyer, but maybe defer capital gains tax, and once they are out of office (with a 6 month investment waiting period), their gains are reduced by the value of investments they purchase up to 1 year out of office. If any investments are found to be held by them while they are/were in office, they penalty is 100% of the asset. (That way, cheating is never worth it, because the penalty will always be greater than the profit)


as an ecconimist this should be looked at as a way the citeczens who bear the burden of loss from these inside trades pay congress defintly more efficiant than taxing us more to pay them more!!


It's not just the congresscritters. Seems there are quite a few people in the federal regulatory apparatus who know they're in a position to get rich a little quicker than the rest of us...

Are our health and safety decisions being made with one eye on their portfolios? What else is going on that's harder to detect and harder still to prove in a court of law?


It seems awfully hypocritical of politicians to crack down on corporate insider trading, while they themselves engage in it. Of course, not all of them do this; but it looks likes the "bad apples" are really enjoying major profits.


What stops the members from passing on the information to their business associates. This a very grey area for legislation. Every new layer of control make this even more complicated. Why not just tax these transactions in a way which will ensure that the benefit of insider info goes to exchequer.


I wonder, though, whether these Congressional investors are in fact insiders (that is, using information not available to the public), or whether they're just using information that is available to anyone who takes the trouble to read the Congressional Record or minutes of Congressional hearings. It's probably true that few people bother to do that, but then few people bother to read SEC reports, patent filings, technical research reports, etc.

Alvaro Fernandez-Ravelo

If I recall correctly "Bananas: How the United Fruit Company Shaped the World by Peter Chapman" mentions that CIA employees invest on companies that they know their actions will affect their stock price.

Larry Kahaner

Please read my blog on this issue:
"Insider Trading: Why is it Okay for Congress?"
Hint: It's not.