I just read this article. It clearly shows how big boys make their money. Secrets to Keep: Insider Trading Hits Golden Age The buyout of credit-card processor First Data Corp. started with a single conversation in December. By the time the deal was announced on April 2, the $25.6 billion transaction involved at least nine banks, six law firms, three private-equity groups, various accountants and technology advisers -- and one very suspicious streak of options and derivatives trading. We have entered a Golden Age of insider trading, an era of expanding outlets for information and lightly regulated venues for trading on it. The size and complexity of private-equity deals makes it a wonder when traders don't catch word of a deal before it is announced. Perhaps that is why some evidence of insider knowledge has cropped up in the purchases of HCA Inc., Freescale Semiconductor, Harrah's Entertainment Inc. and 57 other companies in 2006, according to an analysis of trading patterns done by Credit Derivatives Research. While the Securities and Exchange Commission has hauled up the occasional rogue for a photo-op, these players are only minor at best. Amid the flashbulbs, the agency and the press have failed to get to the essential question: Are there broad, institutionwide abuses going on, helping information get repeatedly funneled from Wall Street's Deal Machine to its friends in the hedge-fund world and beyond? There are all sorts of ways to do this. A bank trading desk may let a hedge fund know that the bank put a company on its no-trading list, implying a deal may be in the works. Someone at a private-equity fund -- which are constantly bombarded with information from banks -- tips off a friend on a deal in which he has no intention of taking part. Or a bank lining up financing ends up on the doorstep of a hedge fund, where the firm might take the information and run with it. In the case of First Data, the right bet in the right market would have netted a 350% return in four months. Might that have been from some lucky coincidences? Sure. But what coincidences. At least when matching up trading data against the day-by-day narrative of the deal from the proxy statement filed with the SEC. Only a few people in the world knew about Kohlberg Kravis Roberts & Co.'s designs on First Data when Henry Kravis first approached company director James Robinson III last winter. On Dec. 1, it cost about $32,000 to insure $10 million of First Data bonds against default, according to data from Markit Group. This insurance, also known as a credit-default swap, is an important part of the insider-trading picture. The closer a company is to going private the greater the risk of a debt default -- because in these transactions the company is loaded up with a pile of new debt -- and the more expensive to insure against it. These swaps are private contracts between two parties but the aggregate of these contracts has effectively become a market unto itself, with prices fluctuating by the hour based on market information. Options and equity investors obsessively monitor the price movements. Swaps are traded only by the most sophisticated players -- hedge funds, banks and insurers -- and it is difficult to identify who is trading these instruments. While the SEC looks at basic stock and option trading, a lot of the insider-trading action appears to be moving to these swaps, and it isn't even clear whether the agency has regulatory authority over them. By Dec. 19, First Data swaps were trading at $49,000 each. On Jan. 17 -- the day First Data told KKR that the company's board wanted to pursue a transaction -- the per-contract cost jumped sharply, to $70,000 from $60,000. By Feb. 21, one bank and two firms were at work on the transaction, a relatively small number by modern deal standards. Still, word had gotten out to other private-equity firms. A number of firms began making inquiries to First Data about a deal, according to company filings. How they learned of First Data's existing dalliance isn't explained. Regardless, the potential for other sources of leaks or favor-trading had expanded. The swap price was largely stagnant until mid-March. Around that time First Data's board decided to invite two other private-equity groups in to study the company's finances, each with their own advisers. First Data on March 19 told KKR and these two rival groups to deliver proposals to the company's board, including details on price. Wouldn't you know it? The default swaps jumped by $10,000 to $76,000 the next day. Here one can only surmise what happened: These bidders might have started sounding out financing sources about pricing a bid, exposing yet another group to the looming $26 billion secret. By March 23, the "tent" of confidentiality was getting crowded. According to the filings, First Data then began calling customers and strategic partners, while KKR contacted its financing sources, a group of five banks each with its own staffs and lawyers. On March 23, swaps were selling at $82,000 each. Two days later the price was $112,000. Stock market investors also were keyed into the First Data buyout saga. Options traders were getting wind that something was going on, either by following the credit-default market or by getting information on their own. There was a spike in trading in First Data options on March 22, according to information analyzed by the Johnson Research Group, with an even larger increase coming on the afternoon of March 23. A deal was announced April 2. How many people learned of the deal along the way? Using back-of-the-envelope calculations that assume an average of 25 people at each law firm and bank while factoring in the losing private-equity firms, their advisers, and First Data itself, one can easily get to 500. Sen. Arlen Specter, the Pennsylvania Republican who sits on the Judiciary Committee, last year held hearings to investigate insider trading and the SEC's response. He didn't like what he heard, declaring that he was "interested in indictments, even more interested in convictions and most interested in jail sentences. How about it? Any jail sentences?" Even Federal Reserve Chairman Ben Bernanke has tried to draw attention to the subject, in remarks on May 15, saying that "U.S. securities laws against insider trading and market manipulation apply broadly to all financial institutions, including hedge funds, and to trading in a wide range of financial instruments, including securities-based over-the-counter derivatives transactions." Translation: Don't insider trade on credit-default swaps. Folks like Mr. Specter and Mr. Bernanke are just beginning to understand today's insider-trading game. Before the buyout boom is over, let's hope we learn the secrets of how it is really done.