I want to ask a question about the purpose of the chinese wall in Investment Banks.
As far as I’m aware, the idea of a “Chinese Wall” or an “Ethical Wall” in Investment Banks is to prevent insider trading, where the sales & trading side of the bank for instance has no idea of the deals that the investment bankers are working on.
The intuition I gathered is that (in the example above for sales and traders) people working in sales can’t buy a stock of a company that’s not yet public nor can they influence the decision of the clients that they provide a service for.
However, I haven’t found any real reason about why a Chinese Wall exists in the first place between the different functions of a bank. Why can’t a Salesperson buy the stock before it goes up, or tell their clients about it ahead of time? Are there any other reasons that the bank would choose to put up a Chinese Wall aside from leaks to the public domain, for instance?
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The insider trading laws are in place to protect people from losing money in a trade because the other person knew a lot more then them. And not because they did more due diligence but because they have access to information. You can not legally get the knowledge they have so you can not trade fairly with them. And those kinds of unfair trades have been made illegal to protect people from them.
A seller in a bank may have access to a clients financial documents which have not been made public yet. And those documents contain information which controls how much their stocks are worth. Only a few people within the company in addition to the bank sellers working on the project have access to these documents and many of them can directly influence what they are going to say. It would not be fair for them to start buying or shorting stocks in the company based on this secret information as the people they are trading with does not have this option. Even just giving their other clients good leads based on this information in order to gain favors later is grossly unfair to most traders. And that is why insider trading is illegal and why banks need to run a tight shift with customers financial information.
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