Study Asserts Startling Numbers of Insider Trading Rogues | Hacker News Reader

Study Asserts Startling Numbers of Insider Trading Rogues

dealbook.nytimes.com

36 pointsluu17 comments

Professional traders have known this for decades. Watching for signs of insider movement and then jumping on has been a popular strategy since forever. (Of course, you have to know how to read the charts... the signs are subtle and ambiguous.)

I sometimes wonder if we wouldn't be better off without the charade of insider trading laws. We could just drop them and stop pretending the water isn't shark-infested. Ironically, Wall Street might oppose this as it might make it harder to attract suckers to the game (if I may mix metaphors).

Some level of uniformity in not-bilking-your-shareholders expectation is probably a good thing, lest management contracts become laden with redundant boilerplate.

Insider trading rules certainly hurt the efficient market hypothesis. If your goal is accurate pricing above all else, insider trading laws are bad news.

>>Ironically, Wall Street might oppose this as it might make it harder to attract suckers to the game (if I may mix metaphors).

No way. The brokerages would brag about their access to inside information, and lure the suckers in with promises of excess returns. It'd be a goldmine.

There are very few "everybody wins" simple policy changes to be found out there. This is one of them.

This is the "Brazilian brothers" case mentioned in the article: http://dealbook.nytimes.com/2013/10/10/two-brazilian-brother...

Another reason could be that there are some really smart dudes profiting using only public or non-material non-public information. It seems hard to disentangle those two sources of information and I can't find anything about it yet in the paper.

Also if you have the raw feeds you can try to detect suspicious activity and then use that activity as a signal for your own trades. If you trade based upon public data (what winds up being insider trading) without knowing the inside information is it insider trading?

But where would that activity come from in cases other than the relatively few activist and hostile takeovers?

Why there is a sudden surge in options activity with no underlying stock movement or news could be very, very specific to the stock and requires understanding of why that might happen. I'm not sure computers have all the info they need (at this point in time) to make that determination with precise accuracy. But, you can simply ask the computer to notify you when it occurs so that you can use your brain to try to make sense of it.

The question is how could that movement be a result of impending M&A activity without insider information?

Well observations of public information that are not widely disseminated or are hard to interpret. For example

1) Change in behavior of insiders because of regulations which leaks information, e.g. sudden silence on a certain subject

2) Observed activity of key persons, e.g. the CEO of a company being spotted with other CEO's

Mosaic theory[1] allows such things under the right circumstances and this would influence price.

[1]: http://en.wikipedia.org/wiki/Mosaic_theory_%28investments%29

e.g. just from a few days ago: https://news.ycombinator.com/item?id=7866930

I'm not very surprised by this. Information gets spread very quickly for this type of activity, infact there are entire funds created around the merger arbitrage scene.

Typically this information is told to a fund by the investment banker or company itself, and then the fund would become "restricted" on the company, meaning once they know a deal is in the works, they can't act on it until the deal has been reported.

Funds know that they are being very closely watched. Some funds do cheat, ala SAC http://www.bloomberg.com/news/2014-04-10/sac-judge-approves-..., but the vast majority don't intentionally trade on the news.

The article didn't mention it but I'd guess most insider trading happens form individual accounts and not funds. The risk reward just isn't really there for most funds, compared to individual investors.

Another argument for breaking up Wall Street and other hives of corruption like Washington DC. There is no reason that those two locations in particular should need to by physically concentrated around a physical location like that.

Some will cry and whine about proximity to the transaction switches, but even that's a policy issue. There is no particular reason that transactions need to be completed in milliseconds rather than actual seconds or even minutes. There are no legitimate efficiencies to be had, only corruption of process and skimming.

The concept of physical co-location of core functions of society and economy are ripe for corruption and doe not provide any advantages that are not utterly overshadowed by the advantages of distribution. It is essentially the transparency and sunlight that disinfects society by spreading out the corruption making it more easily found and identifiable. Distributed government and financial sectors are essentially the transparency that inoculates against corruption.

Distributed government services just makes the pork and corruption harder to control. All the way back in the early years of the Republic Jefferson had to fight against spreading federal functions and contractors all over the country. He knew the only hope for controlling waste and pork was to keep it concentrated in DC.

Does anyone have a link to a reliable reference on what does and does not constitute insider trading in the eyes of the SEC?

Is there a clear definition for what constitutes actionable information?

I bet they prefer keeping it broad and ambiguous. It's a great US law enforcement tradition.

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