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It's actually still possible to perform a specific type of legal insider trading. Example: you are an executive at E Corp and the company will announce its acq
by nostromo 11y ago
It's actually still possible to perform a specific type of legal insider trading.
Example: you are an executive at E Corp and the company will announce its acquisition in two months. You had previously set up planned trades to sell x number of shares each month before then. Because the acquisition is at a premium on the current price, you will make much less money if you go forward with your trades before the announcement. So, what do you do? You cancel the trades.
Was this insider trading according to the SEC? Surprisingly, no! Even though you're profiting from insider information, the SEC rules are such that for insider trading to occur, you actually need a trade.
https://en.wikipedia.org/wiki/SEC_Rule_10b5-1#A_possible_loophole:_canceling_plans https://en.wikipedia.org/wiki/SEC_Rule_10b5-1#A_possible_loo...
Martha Stewart did exactly this before her company was acquired earlier this year:
http://i.imgur.com/ZikHCpP.jpg http://i.imgur.com/ZikHCpP.jpg
- cespare 11y agoSo a "trade canary", then.
- mmanfrin 11y agoI wonder if it would be possible to track the continual sales of stock by large shareholders, use that to buy options based on the canary trades disappearing. This would then lead to the question: am I an insider trader if I am basing my options off of the lack of sales of insiders?
- airza 11y agoNo! Matt levine's articles (which I recommend reading) give an excellent description of this.
- hueving 11y agoTheir sales are very sporadic so it's not as reliable as you would think. Sometimes they need cash to pay for a new house, hitmen, etc. Other times they let the stock vest for longer because they don't need the money.
- mmanfrin 11y agoContinual sales, I mean -- large owners of big companies often have recurring monthly sales of x number of shares. Deviation from this is notable, and a possible source of information.
- losvedir 11y agoInterestingly, if you look at the Martha Stewart chart posted, there's a big spike when she would have sold but didn't... maybe there was some real news at that time, too, I don't know, but maybe there are algorithms already set up to detect this?
- dsjoerg 11y agoThat's not insider trading! That's insider cancelling! totally different
- stcredzero 11y agoNow insider traders will follow in the footsteps of fighting game nerds and obsess over cancels.
- defen 11y agoAre planned trades by insiders public information? Or are they only made public when the actual trade occurs?
- sokoloff 11y agoOnly made public some time after the trade occurs.
- eitally 11y agoThe thing that confounds the situation a bit, for a large quantity of people, is that in certain industries and in certain roles, a huge number of people are considered insiders. For example, anyone at a corporation who can access sales or booking data is an insider ... including the poor CRM administrator in IT or the exec admin in the Sales office. Beyond that, though, in financial services firms it's entirely possible they might consider all employees insiders on all equities. Fidelity does this, for example, and they additionally require all employees' equity holdings solely to exist in Fidelity-managed accounts so they can actively audit for insider activity. This second case seemed more nutso to me than the first, but both are true -- I've lived them.
- peejaybee 11y agoA large swath of people where I worked a couple of jobs back were considered "covered portfolio persons" who had to pre-clear trades in all but a few classes of securities (basically open-ended mutual funds, and small trades in very large-cap equities) and report almost everything. We had to instruct any brokerage firms to send quarterly reports to our compliance department. I don't know if everybody was covered, but everybody in my group was.
- sokoloff 11y agoWorking for D. E. Shaw and later Merrill, we had duplicate trade confirms cc'd to compliance for all trades in all accounts. I didn't have to pre-clear trades in general, though there was a process to do so for some employees and for employees with questions about whether a contemplated trade was OK.
- mattmanser 11y agoThat seems a bit of a stretch to call that insider trading.
- tptacek 11y agoWhy? It's effectively the same action as placing a new order. Cancellations are, for instance, how lots of market makers alter their prices in reaction to events.
- stephengillie 11y agoIt's not very straightforward. It's a trade the way an Electron Hole is a particle. https://en.m.wikipedia.org/wiki/Electron_hole https://en.m.wikipedia.org/wiki/Electron_hole
- peejaybee 11y agoIf I understand correctly, these are planned orders that are un-planned days if not hours before they go out to the exchange, not orders that are sent to the exchange but cancelled before they can be filled. The latter is what the market makers are doing. So it is more effectively the same as deciding not to do what you have been doing every month. It would be impossible to enforce a prohibition against that, as that would effectively be a requirement to sell.
- aianus 11y ago> It would be impossible to enforce a prohibition against that, as that would effectively be a requirement to sell. Why would that be impossible to enforce? If you register a planned trade with the SEC you have to follow through with it or pay a fine equal to the amount of money you saved by not going through with it.
- RyJones 11y agothat puts SEC employees in the catbird's seat - selling access to those pending trades would pay for a lot of trips to Milan
- melvinmt 11y agoI would not get insider trading advice from Martha Stewart…
- deleted 11y ago[deleted]
- ksherlock 11y agoTo be a pedant, Martha Stewart wasn't convicted of insider trading; she was convicted of obstruction of justice and making false statements, etc. Mark Cuban, facing similar circumstances, kept his mouth shut and stayed out of jail.
- danieltillett 11y agoYes this is the lesson. NEVER TALK TO THE POLICE WITHOUT YOUR LAWYER.
- stcredzero 11y agoWhat was that about how most problems in Computer Science can be solved with an additional level of indirection? Maybe the same is true for Insider Trading? Instead of buying options on the stock of a company, use options on the stock of another company that owns options on the 1st company. Perhaps derivatives have gotten so complicated in recent years as a means of hiding insider trading? (Perhaps there are quants with Comp Sci degrees figuring out ways to make detection of insider trades an NP-Complete problem?)
- patio11 11y agouse options on the stock of another company that owns options on the 1st company Not viable -- think how many options e.g. Google would have to own on e.g. Microsoft to meaningfully move the needle at Google. I think you're right overall, though. "Buy exposure to a symbol you are not allowed to trade in." is easy if a) there exists an ETF which you are allowed to trade in, b) you know what the constituents of the ETF are and what their weighting is (trivial), c) you can program a computer to successfully do 4th grade math, d) you are good at trade execution (highly non-trivial).
- stevewepay 11y agoPoliticians in Congress are explicitly allowed to insider trade based on information they hear about. This is why congressmen's stock portfolios are far more profitable than an average person's.
- rayiner 11y agoIt makes sense to insulate Congressman from insider trading charges. They are exposed to so much inside information that the executive could bring charges against them on a whim. Which would have significant separation of powers concerns. Of course, the answer to that is to require all Congressmen to put their assets in a blind trust.
- trhway 11y agosimilar, "relativity" based, approach - the finance dept makes sure that bad news are released before CEO's planned buys or after planned sells, while good news - after planned buys or before planned sells. Just look at history of some corps' quarterly results releases and their CEO's planned trades :)
- hchenji 11y agoELI5...why would you sell shares that you know will increase in value? Or does this have something to do with options.
- marme 11y agohe is talking about canceling a pending sale of stock. When you are an executive or board member of a company you are not allowed to just buy and sell large amount of stock on a whim you must setup buying and selling plans to spread the trades out over weeks or months. So in this case you had a sell order planned over the next few months but now you know the shares will increase in value after the date of the scheduled sale so you cancel the sell plan. This is considered legal because you did not use your insider information to actually trade stock only to refuse to trade stock
- clamprecht 11y agoIs it that easy? So just pre-schedule many possible trades, and in the end, just cancel all except the ones you actually want to do (after getting the inside information).
- sushid 11y agoHow were you able to acquire this source? Is there a public database of some sort?
- mathgenius 11y agoIt also seems that trading currencies is not prohibited by any "insider trading" rules. See: recent unpegging of the swiss franc from the euro. There was much shenanigans in the market before the franc was unpegged.
- erikb 11y agoThere are probably hundred ways to do it legally. Would you be surprised to find out that for every company with such a business model that gets caught there are 10 or 100 or maybe 1000 that do the same thing but more smart and therefore with legal protection? Wouldn't shock me.
- jlebrech 11y agowhat about making 1000s of trades and cancelling the risky ones via insider info. then the good trades weren't insider trades?
- jlebrech 11y agohow about monitoring regular sales for sudden stops and buying those shares?