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Comment by clpm4j | Hacker News Reader

"Sung Mo Jun, Joon Jun, and Chon allegedly used encrypted messaging applications to discuss their trading in an attempt to evade detection. According to the complaint, Sung Mo Jun, Joon Jun, and Chon made approximately $3 million in total profits from the illegal scheme. The SEC Market Abuse Unit's Analysis and Detection Center uncovered the trading ring by using data analysis tools to identify the traders' improbably successful trading over time."

I'm curious which messaging app they used. I also wonder if someone tipped off the SEC or they just uncovered this in their own analysis work - it doesn't seem like making $3m off Netflix stock trades over a couple of years is particularly alarming on the surface, but idk I'm not an expert... maybe the timing of the buy orders and also looking into what other trades they were making (if any) was easy to spot.

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It’s part of their new “EPS Initiative” where they use an analytics tool called ARTEMIS (I forget what the acronym stands for) to assign a risk score to certain transactions and traders. It’s interesting because although the SEC has been pretty tight-lipped about the data inputs it appears there is some degree of “who-you-know” factored into the risk score. So two people can make the exact same trade at the exact same time but if I have a close friend or family member affiliated with Netflix and you don’t then my trade will receive a higher risk score.

It’s part of a broader change in the way the SEC approaches insider trading. Previously they took an “issuer based” approach where a big pop or loss in $ABC triggered a look at all the trades in the right direction prior to the announcement. Now they take a “trader based” approach where they look at person’s pattern of activity over time.

So if your spouse or sibling works in M&A and tips you off to potential deals so you can make (relatively) small investments on the inside information the scheme will be flagged and investigated much more quickly.

ARTEMIS stands for the Advanced Relational Trading Enforcement Metrics Investigation System.

Also Artemis was the goddess of hunting in Ancient Greece.

And perhaps more interesting to WSB folks, Artemis is also the goddess of the Moon.

How do they know whose friends are friends with whoever else?

Your public friends list on LinkedIn, Facebook, etc?

I'm certain it's easier than basically any point in human history to obtain such information from: intelligence agencies, social media companies, data brokers/advertisers, etc.

I don't think SEC has any encrypted messaging reading capabilities but average guy suddenly making regular killing on the market with the same stock does turn on red flags.

And then it's a matter of connecting the dots - most often the dots between the "lucky" guy and someone within the company.

Done.

I'd hazard a guess that you don't even need to make a killing or do it suddenly--every insider scheme I've heard about involves getting company performance data a few days before it is publicly released at an earnings call or a 10k (or notice of an M&A a few days before it is announced).

If you consistently make directionally-correct trades (no matter how big) on one particular symbol (or derivatives of it) within +/- n days of earnings, that probably raises your risk score. Probably even more if your trades are always the same day of week before earnings or same number of days before earnings.

I was working overseas once, and a cousin I’ve never met coincidentally purchased some stock in my employer. It wasn’t a huge order, and there was nothing especially strange about the transaction (no massive gains or anything). But their local version of the SEC investigated it and got in touch with my company about it.

I’d be surprised if the SEC wasn’t proactively monitoring this sort of thing on some level.

That's all well and good, but statistical anomalies and potential personal ties to insiders don't prove cases, especially criminal cases. Unless they have the actual texts from whatever "encrypted messaging apps" they were using, they won't people to prove these allegations. If you could go to jail merely for being suspiciously lucky in the markets while knowing corporate insiders, lots of hedge fund managers would be in prison right now.

Correct. That is why they use this circumstantial evidence to get a search warrant to confiscate your phone and other devices, read your email and other messages, and then question you until you, or one of your co-conspirators, breaks.

...which includes lying to you and telling you that the other parties have already confessed, and that you'll be the one holding the bag in jail if you don't confess as well.

A few hours of this, and unless you have the foresight and tenacity to demand a lawyer, most people break. Only one of them needed to break in this case.

How does a system created by the SEC detect that person A is a (close) friend of person B, with accuracy? Family I can understand, if you share the same last name etc, but friends?

They could have their own little PRISM.

This is the most important question IMO.

However, I'm not sure they do have that information. I would speculate that the number of people who make large option bets before earnings correctly on the same stock over multiple quarters should be zero and if it is very small, it is worth investigating. If they see that a subset of traders is 3 people with Korean names, that would immediately suggest that something is wrong...

Dont really know enough about this to do anything other than wild speculation but Id lean towards something like: If a trade crosses a certain risk score threshold it would trigger some kind of preliminary investigation looking at limited information. If the preliminary investigation determines the trader has relationships with a company insider, its then added to the metrics and the risk score may ramp up to a level which would trigger a wider investigation.

But honestly, it’s much more likely that it was simply the timing of the trades and the earnings reports multiple times over a couple years raised some eyebrows.

What’s really interesting is I believe at least one commissioner (or perhaps staff member?) has made comments hinting that it works the other way, too. It can identify “related” transactions executed by other seemingly random people and, when they look into it, they find out the person who executed the trade does indeed know the original person under investigation.

They have lists of all your phone contacts (if you uploaded them to Apple, Google or socials), your socials friends/followers, the people you call and text (via cell service providers)... These all get shared interagency. It's not like the SEC is collecting it themselves.

> it doesn't seem like making $3m off Netflix stock trades over a couple of years is particularly alarming on the surface

It can actually be harder to make money off of insider information than it sounds. The market doesn't always react in the precise way you might expect. As a result, inside traders usually make large sums of money one of two ways:

1) With single, huge bets placed on huge news that shocks the stock price.

2) With many, medium bets placed around regular earnings reports.

In the first case: If someone never trades options and then suddenly places a single, large, highly-leveraged trade that happens to pay out handsomely, that's an easy red flag to spot.

In the second case: If someone is pattern trading in the right general direction around most earnings releases and they happen to work for the company (can be as simple as a public LinkedIn search) then it's obviously a red flag.

The encrypted messaging app is a red herring. The SEC isn't eavesdropping on their comms. They're getting one or more of the conspirators to flip on the others in exchange for reduced sentences. One of them gladly gave up the messages as part of a bargain.

> "They're getting one or more of the conspirators to flip on the others in exchange for reduced sentences. One of them gladly gave up the messages as part of a bargain."

That's possible but they also could have just seized one of their phones or whatever and recovered the chat history that way.

Some of these guys just buy weekly options ahead of an earnings call, after a few hits it's basically screaming to some statistical algorithm at the SEC "hey, please put me in jail!". Digging up admissible evidence is harder, though.

Maybe one of them cracked.

They probably all cracked.

The SEC could put them in a perfect "prisoner's dilemma" game and we're only talking about regular people, not hardened operators with like, a suicide capsule in their molar.

Yeah. Reminder: if you witness something of this sort consider using the SEC Whistleblower Office (http://sec.gov/whistleblower). You'll get 10% - 30% of the collected fines, and there's a cottage industry of lawyers that will compile the case for you (or tell you that you don't actually have a good case, which I heard is actually common).

Snitching is wrong.

It could be considered wrong, depending on your personal ethics. That's why I wrote "consider".

It’s not snitching. It’s predating on prey. If you don’t want to be prey, don’t try to insider trade where I can eat you.

Breaking the law is wrong. Snitching is a civic duty.

Do brokerages give all this info to the SEC so they can do this type of analysis and then be able to personally identify the buyers/sellers?

It seems wrong that my personal info is being given out by my brokerage, in a way that lets them identify my personal trades.

Talked with an SEC guy at a conference one time, they have access to every order that touches any American exchange (filled or not) in a huge data warehouse, apparently most of this detection is just a series of SQL queries.

Inside trading of the information in that database would be something!

You can buy access to every trade being made (executed or not), but it won't have the information the SEC has like your name attached to it or if it was an opening or closing trade.

you can find this information online, trades (orders after they have been completed) are "public knowledge".

insiders are required to report their trades (search for "sec Edgar").

it is hard to make money knowing that a trade has taken place.. you need to know BEFORE and this is clearly illegal with very serious penalties (martha stewart served jail time...).

Might be a regulation that brokerages have to comply with? Seems like a reasonable solution if such regulation was made in order to detect insider trading.

Indeed it is : https://www.catnmsplan.com/

The trading information is essentially public.

It’s just a matter of finding suspicious trades to start an investigation.

Trading information is public (quotes and trades) but the originating person/entity is not, so it would be hard to detect this via the public trade log or quote book since you couldnt see track records or profitability.

That said, the SEC does have access to the full dataset including the person/entity making the trades.

SEC/FINRA only gets access to blue sheet data. They don’t have direct “real time” access to all trading data.

This is why their data analytical skills are so impressive.

If you are trading on an SEC regulated exchange: https://www.sec.gov/fast-answers/divisionsmarketregmrexchang..., then yes the SEC can see everything.

Most trades through a brokerage don't make it on an exchange. They're internalized by a wholesaler like Citadel Securities. Which is the reason for the question.

They still have to report to tape. You can’t really hide exchange listed stock trades.

These types of orders are sent as "crosses" where "citadel" reports they are both the "buyer" and "seller".

As an example, according to the NYSE FIX Spec, this is 54 (Side) = 8 (Cross).

This is how they are able to "internalise", by crossing retail flow vs their house account.

CATNMS https://www.catnmsplan.com/ helps with this.

I haven’t touched compliance in a long time. I tho they have to report to tape, not as a cross. They always have to report due to Manning rules.

Also, the trades were done prior to CAT. I suspect it’s from Blue Sheets.

Well, prior to CAT they had OATS, which has been around for a very long time, but was only "top level" messages (not a deep trace into the stack).

If you combine crosses with OATS you can still get some of the data you are looking for, just not as cleanly as with CAT.

This is what CAT was built to address https://www.catnmsplan.com/

you send your order to your broker/dealer, they send it to their OMS, which sends it to Citadel, who sends it to their internalisation engine..

All of these messages, including order Identifiers to create the linkages are sent to FINRA.

So your broker sends order "123ABC" to Citadel, FINRA gets this and can trace your order back up and down the "stack" however they want.

Ah cool, are the internalized orders reported publicly anywhere or are they just sent to the SEC/FINRA?

You're trading securities in the United States on a registered exchange through a registered broker, it is all heavily monitored and regulated, to assume there would be any sort of anonymity on a trade is delusional.

>It seems wrong that my personal info is being given out by my brokerage, in a way that lets them identify my personal trades.

Unlikely.

More likely is that the brokerages and/or exchanges submit transactional order-book trade data to the SEC (i.e. anonymous numbers .... timestamps, quantity traded, direction).

If the SEC then spot something, its just a case of picking up the phone to the brokerage and asking to ID the client for the transaction at a given timestamp.

The IRS gets information from your brokerage on your trades with the proceeds and cost basis for each.

Not exactly.

Most exchanges require the client details to be sent to them (encrypted) so the regulators can see who is behind the orders on a real-time basis.

Canada for example is behind the times here, but has a program to address this : https://www.iiroc.ca/members/client-identifiers

If you are a corporation, you are required to provide your "Legal Entity Identifier (LEI)"

If you are a retail client, your account number is sent.

In some jurisdictions (like UK & EU) the regulator automatically receives at least the name, birthday and national ID of each client concerned with a trade and the IDs of the traders involved. If they want more details they just need to ask.

What do you expect from SEC regulated markets/exchanges with AML/KYC and heavy regulation? Anonymity?

Sometimes privacy has costs, so do the cost-benefit analysis. What’s more important, your privacy from some investigator at the SEC who has access and abuses their position, or the SEC’s ability to detect insider trading?

yes, they do, It is called "CAT" https://www.catnmsplan.com/

Broker/dealers send order data to the regulators daily.

It isnt 'wrong', you agreed to this when you opened your account,and the broker/dealers are REQUIRED to provide this as it is a "market rule".

EDIT : replace "trade" with "order"...

It’s required by law. The SEC and their counterparts have access to pretty all information on trades within their remit as gamekeepers. You broker will have told you this in your client agreement and their privacy statement.

Yea, possibly this plus messaging metadata.

> Some of these guys just buy weekly options ahead of an earnings call,

Obviously working for the company in question makes it different, but this doesn't seem crazy or unusual.

I've worked placed where it was very easy to predict the stock movements ahead of earnings call since the company's success/failure is in public eye a lot (same true for netflix?).

The top 5 companies in terms of market cap get lots of attention and analysis. I bet most people could review that data before the earnings call and guess the movement of the stock enough to make money.

Again, i would never touch my companies stock on the market but it doesn't seem like you need insider knowledge at a lot of big companies.

Then why aren't you a multi-millionaire yet? One can easily multiply their pot every 3 months playing a few companies with simple option strategies, provided it's really that predictable. More importantly, if this is predictable then why is there volatility around earnings? Surely enough people would have figured it out by now.

> Then why aren't you a multi-millionaire yet?

Well, as you said, not everything is a win, and sometimes you lose. Some people don't have the money to deal with options and handle a loss.

But who said i wasn't a millionaire ;)

How do you know he isn't?

Okay then, why aren't a million people doing it to the point where the "free" money has been squeezed out of the price?

Most people can't afford to invest significantly enough to buy into expensive trading opportunities like options or day trading, and "buy and hold" investing doesn't yield enough to justify the efforts in research.

>I bet most people could review that data before the earnings call and guess the movement of the stock enough to make money.

If "most people" could do this, "most people" would.

Apple is one of the most popular stocks, and one of the biggest companies. After a quick search i found this [1] quote. I bet if you asked most people "will apples stock go up tomorrow? its expected they sold a lot of iPhones" most people would say yes, and if you said "will apples stock go up tomorrow? its expected they sold less than expected numnber of iPhones" then they would say no

I think the issue is not that most people can't "guess" the outcome, its that they can't afford (in the short term) the money to invest. Many people take years into their career before they can significantly invest and save money. Especially true for people who can afford the risk of options trading, which is more risky than "buy and hold" investing.

The article in question mentions netflix engineers who make large 6 figure salaries. They could probably afford to make well educated bets on many other stocks and profit handsomely after several years.

> Birinyi Associates studied Apple’s post-earnings stock behavior since 2009. It found Apple stock has gapped up, or shot higher 65 percent of the time in after-hours trading, right after its earnings report, with an average pop of 4.7 percent. On the next day, whether it gapped up or down, it has traded lower 65 percent of the time for a 0.92 percent decline.

[1] https://www.cnbc.com/2018/05/01/heres-how-apples-stock-usual...

The math isn't exactly hard on this. A person who can reliably make double digit returns monthly or quarterly could literally start with $100 and become rich.

> start with $100 and become rich

Practically speaking, this isn't that easy. Most people don't have hundreds lying around to invest, especially not in risky trades.

Also, options (what is being discussed) are often a lot more than $100 - Eg. Opening Robinhood rn shows me AAPL options around 150 whhile GOOGL options are 2k+ while AMZN is 3k+. Even if someone is very confident in a stock movement (and realistically, its obviously not guaranteed), thats a lot of money for the average person, especially when they could lose it. You have to be somewhhat well-off to stomach multi-thousand dollar losses - especially at the start.

(also earnings are 1 per quarter)

Uhm, strike prices are not option prices.

Ooops yes. Read to quickly. Options prices are still often out of price range of common people, especially considering the risk.

This makes no sense if you tug on it just a little bit. Suppose a stock is trading at $100/sh and via analyzing these signals leading up to earnings next week, “most people” could correctly predict that it will pop to $105 after earnings. “Most people” would then logically be willing to bid at least $104.50 (and probably closer if they were more certain), meaning as soon as the information was out to most people, this $5/sh opportunity would be arbitraged away.

There are entire firms trying to squeak pennies per share out of the market. To think that some backlog of data that most people could plainly interpret would lead to a pop after earnings is very difficult to believe.

I think you're tugging a lot more. I don't think that most people can estimate anything beyond "this earnings call makes the price go up or down [a little/lot]". I'm not referencing some missed arbitrage opportunity, just that general stock movements can likely be predicted before earnings calls for well-reported companies.

People with insider trading knowledge don't seem able to accurately predict the exact price, but they know if its good/bad/great news and how wall street reacts to that .

Try it. Take 5 companies whose share price reactions might be predictable ahead of time by "most people" and for each of the next 4 quarters make an up/±epsilon/down prediction. See how often you're right.

Always trips me out that people think that it's so easy to make money "day trading"

A few of the consumer broker apps have a 'practice mode' with a few tens of thousand of virtual practice cash to use with the price reacting to real market data - you could do this in real time!

> have a 'practice mode' with a few tens of thousand of virtual practice cash

I'd like to see what someone ends up with investing a more meager amount, like 1k. That's likely what a lot of young adults have in savings they could potentially invest.

Not legal advice but in many common jurisdictions that would not necessary be a offence since they aren’t acting on inside information but rather executing planned trades. Though it would likely raise eyebrows and one would need to be mindful of related concerns like closed periods in the securities, which are far easier to monitor.

The article goes on to say that tools the SEC uses made the success of the trades look improbable.

The only fine I see listed is for about $72k. I can't tell if the scheme was profitable or not because that was just one person. I assume the others are going to trial, so we won't know for a while.

> it doesn't seem like making $3m off Netflix stock trades over a couple of years is particularly alarming on the surface

It is often the manner in which this money is made. Very concentrated bets, like buying far out-of-the-money options, that let you get enormous leverage - buy the option for pennies, exercise for $50. Combined with the absence of activity on other stocks, lack of other regular trading etc.

If you just had a "hunch", bought some shares of Netflix, maybe some other techy stocks for camouflage, and made your "measly" 10% return a few times, you'd probably never be caught. But that's not life-changing of course. To make the $3m over, say, 4 trades, you'd need to have $7.5m to play with, which is quite a lot.

"Encrypted messaging application" is probably used as a scare phrase to bolster their case. iMessage, WhatsApp, Facebook Messenger, Signal, Telegram and lots more would qualify.

Basically don't make outsized short dated option bets on earnings stocks if you want to stay out of jail.

Almost every case of insider trading is because of this pattern.

It makes sense. You have information that you think gives you an edge. Trading "linear" stocks is boring. You need something that will give you an asymmetric payoff to compensate you for the asymmetric info you just stole.

I think the word "allegedly" probably indicates SEC did not use the messaging app as the route to uncover this.

If I were a part of SEC, unless there is some regulatory hurdle, I'd use some other information (e.g., some gov documents? linkedin?), and use that to construct a giant watch list for insider trading even before trades are made.

Can the SEC get a search warrant to seize the endpoint devices and search them? (If not, can they use evidence gathered by the parallel criminal inquiries?)

The word allegedly indicates the accused haven't been convicted of a crime, yet. Not using that word implies guilt, which the SEC hasn't proven, yet. It's pretty standard practice to see that word used like that.

do they get jail time? or just fines?

If they lie they get the Martha Stewart special which is apparently harsher than an attempted coup.

Should have used Kakao. Guessing they used something based in the US.

I'm pretty certain that kakao provides data to international intelligence, so wouldn't make a difference

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