Three new recently published scientific papers seem to confirm what many have claimed for years: the “efficient markets” are not only inefficient – from an informational standpoint – they are also badly rigged. Of the three papers, the Economist report argues that well-connected insiders profited even from the financial crisis, while the other two go so far as suggesting the entire share-trading system is rigged.

Unlike conventional insider trading cases – which traditionally require fortuitous tip-offs and extensive, expensive investigations, involving the examination of complex evidence from phone calls, e-mails or informants wired with recorders – the papers make imaginative use of pattern analysis from data to find that insider trading is probably pervasive, according to the Economist.

The approach reflects a new way of analyzing conduct in the financial markets. It also raises questions about how to treat behaviour if it is systemic rather than limited to the occasional rogue trader.

The first paper starts from the private meetings American government officials held during the crisis with financial institutions. As discussed here years ago, what was not made public at the time were critical details about the infamous TARP program (which incidentally was created and administrated by current Minneapolis Fed president Neel Kashkari who paradoxically rages every day against bailouts of Too Big To Fail banks), notably how much money would be involved and how it would be allocated. This mattered hugely as the very survival of some institutions was at stake; in the end, hundreds of billions of dollars were pledged. Knowing the structure and scope of the bail-out in advance would have been a vitally important piece of information for investors during this period.

The paper examines conduct at 497 financial institutions between 2005 and 2011, paying particular attention to individuals who had previously worked in the federal government, in institutions including the Federal Reserve. In the two years prior to the TARP, these people’s trading gave no evidence of unusual insight. But in the nine months after the TARP was announced, they achieved particularly good results. The paper concludes that “politically connected insiders had a significant information advantage during the crisis and traded to exploit this advantage.”