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Insider trading has been rife on Wall Street, academics conclude
- montrose 9y agoI love the technique of catching misdeeds via subtle statistical traces that the bad guys leave. It is extremely hard not to leave a statistical signature when you do something bad repeatedly. You leave tracks you have no idea you're leaving. And since it does seem likely that there's a lot of de facto insider trading, I expect there will be more studies of the type described in this article.
- RcouF1uZ4gsC 9y agoBeing a retail customer on Wall Street is a fool's game. The large finds have access to legal data and insights that you don't have. Just invest in an index fund or large mutual fund.
- samstave 9y agoIsn’t that Vanguards Rule?
- Pokepokalypse 9y agoIt's anybody with common sense's rule.
- JumpCrisscross 9y ago> Being a retail customer on Wall Street is a fool's game There are time periods [1] and strategies [2] in which individuals outperform. (That said, most people should just track the marker.) [1] https://www.eurofidai.org/sites/default/files/pdf/EUROFIDAI_papers/JFE%20ARTICLE%2004052016.pdf https://www.eurofidai.org/sites/default/files/pdf/EUROFIDAI_... [2] https://www.alexandria.unisg.ch/231425/1/14_08_Soderlind%20et%20al_Individual%20Investor%20Activity%20and%20Performance.pdf https://www.alexandria.unisg.ch/231425/1/14_08_Soderlind%20e...
- jxm262 9y agoI'm interested in your first link but it seems down (404). Would you happen to have an alternative, or just post the title?
- ipsin 9y agoThe URL has an extra "Q" at the end. https://www.eurofidai.org/sites/default/files/pdf/EUROFIDAI_papers/JFE%20ARTICLE%2004052016.pdf https://www.eurofidai.org/sites/default/files/pdf/EUROFIDAI_...
- craftyguy 9y agoYour first link is broken. I think maybe you meant this? https://www.eurofidai.org/sites/default/files/pdf/EUROFIDAI_papers/JFE%20ARTICLE%2004052016.pdf https://www.eurofidai.org/sites/default/files/pdf/EUROFIDAI_... (there was an extra 'Q' at the end)
- achamayou 9y agoInvesting in an index fund effectively means letting a financial services company such as S&P Global manage your investment without you being their customer. And if you're not paying for it... Sure, you'll pay a low fixed commission to the fund, but they're just tracking what S&P publishes. It's not necessarily a bad idea, but it's hardly a panacea with perfect incentives.
- walshemj 9y agoAbsolutely if you can only afford $50/$100 a month the an index tracking the FTSE or the DOW makes sense. Once your portfolio gets bigger start having a minimum investment amount of $1000 you need to start thinking about diversification.
- tc313 9y ago> start thinking about diversification Buying an index fund composed of 500 large U.S.-listed companies is pretty diversified. I suppose you could diversify internationally, but no need to stray from index funds if you're not managing your money full-time.
- achamayou 9y agoStocks aren't the only asset available for investment, regardless of geographical location. They're also fairly volatile, so retail investment often consists of blending that with more stable fixed income assets.
- walshemj 9y agoI meant in different countries and sectors I did very well with a commercial property trust a few years back when the sector was out of favour.
- dlubarov 9y agoYou can use an international stock index fund like VT. That will include some real estate companies like EQR, but if you want extra real estate exposure, there are index funds like VNQ for that. Or if you want bonds, there are index funds like BND.
- adamnemecek 9y agoI wouldn't be so diffident. In my experience, Wall Street for example doesn't understand tech that much. E.g. exactly a year ago, Nvidia had a three month dip. After I listened on the earnings call, all the WS people were asking "why are people still buying gpus and why is it accelerating". They didn't know about ml, gaming and crypto. Wall Street is too oriented on the next 3 months, not the next year.
- useranme 9y agoIf one has the ability to trade when the price moves, one makes more by selling Nvidia in the beginning of a dip and buying it on the uptrend. Wall Street not understanding tech that much isn't as important if Wall Street can react to the price change.
- matt_wulfeck 9y agoOPs point is still good though. Retail investors can often have “one-up” on the industry. Investing into that edge can be a real advantage.
- sgt101 9y agoThe OP is deluded. Yes, on the earnings call they're not sitting there saying "guys, girls, Nvidia stock is going to be driven up by ML" but that's not because they don't know, it's because there is no value at all in them disclosing this. Everyone on the call knows it, what they are trying to do is to shake lose some info on one of the cashflow facts that can then be used by an activist to squeeze the Nvidia board into cutting investment and issuing a dividend. If you think you have an edge on people who are paid to do a job I suggest that you take up cage fighting - it will provide a set of instructive lessons on the limits of amateur capability. Some people get lucky, most people get poor, everyone else invests in indexes.
- adamnemecek 9y agoWall Street might be aware of ml but they underestimated how much of an impact it would have on GPU sales. > If you think you have an edge on people who are paid to do a job As I said, they are too concerned with the next three months, not the next two years. Also, like how many people on wall street specialize in nvidia analysis? And I do think that it's possible for an amateur to beat a professional under certain circumstances. Also please listen to the earnings call. It should be the Q2 one.
- paulie_a 9y agoNot to boast, but I have consistently done better retail investing on individual stock than my IRA well ever do. I divested from a couple funds they couldn't even beat inflation.
- tossaway1 9y ago>I have consistently done better retail interesting on individual stock than my IRA well ever do Your comment doesn't make sense to me. Don't IRAs allow for investing in individual stocks...?
- paulie_a 9y agoIt was a managed IRA, I figured I'd let the professionals handle it. I only play around with the markets
- rebuilder 9y agoWhat's the timeframe? It's entirely possible to beat the index for a time by flipping a coin. A lucky streak early on can set you up for success, for example. I've found www.chartgame.com quite illuminating in this regard. You can beat the average for "years" just randomly bashing buttons, but of course most of the time you don't.
- deleted 9y ago[deleted]
- dsacco 9y agoIf you are a programmer with a good understanding of statistics, you can get access to legal data not reflected in market prices and profit on smaller capacities than hedge funds. In fact, you can achieve a Sharpe ratio comparable with the best modern trading strategies (albeit without specialized knowledge, infrastructure and a full team you won’t be doing it on billions in AUM). I gave a basic guide for doing this with equity prices just yesterday in a comment here: https://news.ycombinator.com/item?id=16349011 https://news.ycombinator.com/item?id=16349011 The short version is that you need to find actionable data that reliably maps to the revenue of companies without many revenue streams, collect the data (basic programming skills), build a timeseries and forecasting model from that data (statistics and basic financial knowledge), then take a contrarian position when expected earnings are very far off from what your data predicts. This outline is structurally similar for non-equity securities. Obvious caveat: I still basically recommend people invest in diversified index funds. But speaking as someone who has done what I just outlined, I see no reason not to give a clear-eyed explanation if you’re already set on active trading.
- eksemplar 9y agoOr buy after crashes and sell when you see nice gains. It requires patience but the market has been really silly since the 2007 crash. Like the diesel crisis for German autos. Stock plumeted but it’s not like VW is going to stop being successfully at selling cars over a political scandal, so it was obviously going to recover. When Trump talked about regulating foreign green tech in December the entire world dumped their stock in solar and wind companies. A company who had just signed two billion dollar contracts in China and India went down 150 points in one day, it’s already made 50 of those back. It’s honestly behaving more and more like crypto currencies, so maybe now is a good time to get out?
- tonyedgecombe 9y agoOr buy after crashes and sell when you see nice gains. The trouble with that is you can be out of the market for a long time waiting for the crash, all the while missing gains.
- twoodfin 9y agoThe description of the second paper’s conclusions don’t seem particularly damning. Large active investors have a huge incentive to acquire relevant information prior to big announcements. That’s why they have expensive research departments.
- rockinghigh 9y agoIf that information is material and non-public, it’s considered insider trading.
- danielvf 9y agoThat's common confusion. If you work at Wal-Mart, know the financials of store sales before it is released, and trade off that, you can go to jail. But you don't work at Wal-Mart, buy satellite imagery and count cars in the parking lots to estimate sales, and trade off that, then it's totally cool. It's not so much that the information is non-public that makes it a crime - it's the insiderness - abusing a position of investor's trust.
- kasey_junk 9y agoIt’s more detailed than even that. You can trade if you disclose you are doing it for instance. Really what people should remember is that insider trading laws aren’t to protect the rest of the market. They are to protect the existing investors. Illegal insider trading happens when you have fiduciary duty to someone else (other shareholders) and you steal from them.
- discoursism 9y agoOnly if the information is acquired from an insider. If you develop exclusive information without relying on internal sources, it's not insider trading. But that is very hard to do. I'm convinced that some amount of insider trading is going on. Just the other day I was in a sauna at a gym in midtown and walked in on some bankers discussing a deal they were working on and literally whether they ought to illegal trade on their insider knowledge. They kept on talking about it for a time while I was with them, and then said of me, "Better hope this guy's not from the SEC!" It was pretty blatant. Now these kids were idiots, so maybe they wouldn't even be able to make a profit with insider knowledge. But if they're talking about it, I'm sure non-zero numbers of people are doing it.
- Pokepokalypse 9y agoWait until someone figures out how to prove that by playing chicken with a budget resolution, several key congressmen have learned how to game the VIX.
- votepaunchy 9y agoIf by “chicken” you mean a bipartisan agreement to end the sequester and boost both military and domestic spending. And raise the debt ceiling. And whatever else was stuffed in the 650 page “continuing resolution”.
- murph-almighty 9y agoI don't think Pokepocalypse is wrong. If two Senators time their investments right, they could easily make money by shorting the market before manufacturing a budget crisis. Just use a third rail issue that riles up your voters as an excuse ("This plan funds abortions/provides tax cuts to fracking operations") and you have a reasonable cover for your oddly timed transactions. Disclaimer: I don't think this caused the current spate of shutdowns.
- mobilefriendly 9y agoThere would be legal jeopardy https://en.wikipedia.org/wiki/STOCK_Act https://en.wikipedia.org/wiki/STOCK_Act
- bjelkeman-again 9y ago> Changing the law to fix that may not even be feasible That seems a very weak conclusion. I actually expect more from the Economist.
- TheOtherHobbes 9y agoI would suggest you have more generous expectations than many regular readers do.
- __blockcipher__ 9y agoIMO insider trading laws are unenforceable. Plus insider trading makes securities more fairly valued. Full disclosure: I’m a milton friedman fanboy
- hendzen 9y ago"They find evidence that large investors tend to trade more in periods ahead of important announcements, say, which is hard to explain unless they have access to unusually good information." Typically for regular macro-level financial announcements like GDP growth, employment numbers/non-farm payrolls, rates announcements, etc, the announcements happen on well-defined, publicly known intervals. Similarly for company specific things like earnings announcements. It is expected that there will be lots of (non-insider) trading before these announcements - active investors may just want to reduce risk before a large move in an unknown direction. Of course, I don't doubt that there is a large amount of insider trading, but its worth considering other causes of an observed phenomenon rather than just jumping to conclusions.
- jnordwick 9y agoI traded those news releases and earnings announcements for almost 10 years. There is no information leak on the news side. The market becomes completely silent leading into the second before the release (some countries do have issues though, but relatively small). Earnings announcements are a little different but still not a problem. A scene like Trading Places FCOJ isn't happening.
- m3kw9 9y agoSome ceo giving you secret handshake before an unannounced event is very simple to do
- fallingfrog 9y agoWhat really irritates me is that for a whole generation of people, there is really no other way to prepare for retirement than to throw your money into the stock market via a 401k. And it's a rigged game. If you try to move your 401k from stocks to bonds it will take 2 full trading days; in that time the market can drop 30%. The exit doors are narrow and you're not first in line. Especially if you've put money in at the top of the market- expect to get screwed.
- wtvanhest 9y agoYou're not supposed to try to time the market. The delay is a feature, not a bug.
- fallingfrog 9y agoIt's a feature when you consider what the intended goal of the system is, which is not to help you fund a comfortable retirement.
- tc313 9y agoIt’s rigged against you if you’re implementing a strategy for which two days makes a big difference. But buying and holding a diversified portfolio has been shown to outperform the majority of hedge funds (after fees) over the long-haul.
- teej 9y agoExactly this. Whatever happened to “you can’t time the market”? Don’t day trade with your 401k.
- jnordwick 9y agoYou should only short term trade with your 401k. It sounds perverse i know, but there is no tax liability for changing your position. Your long term trades will get a lower capital gains rate regardless.
- jnordwick 9y agoThe only show correlation under an overly simplified model and show odd signs of data massage or p-hacking. For example the TARP paper shows that those with government connections performed better, but only after 9 months, and we dont know if that was a blip that then reverts back. I've only scanned the paper. Why after 9 months? The usual mechanism of front running the info you would expect the largest difference to be immediate and normalize from there. That is a warning sign for me that these papers aren't very rigorous or their model is too simplistic. The other paper talks of information leakage on large order flow, but that is supposed to happen. When a broker has to transact a large order and he shops it, it would be silly to not expect leakage. The counterparty he goes to now knows about a big order and it will change his perception of things regardless of how many laws you make. With the era of even better algos to sniff out intent, some of this leakage could be from just better data mining tools. Do people expect 100% hidden info to all of the sudden go live and tank a price when a huge trade is printed? Leakage is often wanted to give the market time to adjust.
- jnordwick 9y ago-1 really? This isn't the greatest comment in the world but negative? HN and any financial/economic topics don't mix well at all. Edit: Do people really consider this comment worse than almost every other top-level comment? It currently stands second to last, the last being bitcoin spam. Maybe my view of comment quality is off? (This edit is taking the suggestion from the response below.)
- carapace 9y agoBroadly speaking, mentioning downvotes is frowned on here and will get you more downvotes. The exception (as far as I have seen) is asking people to explain their downvotes, e.g. "Downvotes, please explain?" Sometimes that will get you good feedback.
- jnordwick 9y agoDon't care about more downvotes, my average comment score isn't the greatest (I've never even cracked 1900 karma in many many comments over the years). What does interest me is individual comments. It appears to my curiosity about ranking things (like ELO and such in games and sports).
- jwcacces 9y agoI'm shocked... shocked to find that insider trading is going on in here
- hinkley 9y agoHere are you winnings, sir.
- zerostar07 9y agoThat is good for bitcoin
- paulie_a 9y agoI for one am shocked... I am glad this is getting more thoroughly documented though
- geoffc 9y agoFor the last 30 years I have bought stock in tech products I use and like and hold it until I no longer like the product. This simple strategy has dramatically outperformed the indexes. In hindsight the last 30 years have been great for tech so maybe I just got lucky on my industry selection.
- icebraining 9y agoWhat were you holding during the dotcom bust, if you don't mind me asking?
- dboreham 9y agoAMZN, hopefully?
- geoffc 9y agoMy product tastes are pretty mainstream, nothing obscure. In the early days I liked Windows and Netware as I did a lot of consulting work with them and had good runs with them. I sat out the dotcom boom and bust as I was putting all my cash into my gigs. In the internet era I liked the business Saas'es (SFDC, N, HUBS, BOX) because I believe in and understand that industry. I was amazed by OSX the first time I tried it so bought Apple. I bought Amazon, Google and SIRI pretty early when I saw what heavy users of the products me and my family were. I was blown away by the first Tesla I saw and bought that. I like the latest fitbits so I just bought some of that, let's see what happens to that. I don't look at the price or financials on either the entrance or exit so on the negative side I sold Apple a few years ago and missed the last half of the run.
- pedrocr 9y agoWhat criteria do you use to exit then? Do you track returns over time somehow? Would be really interesting to compare to Nasdaq or another relevant benchmark.
- 9y ago
- gesman 9y ago>> well-connected insiders profited even from the financial crisis. THAT's when the biggest money are made.
- otakucode 9y agoWhen white collar crime is normalized and only lightly punished when very rarely caught... why would anyone expect anything different? White collar crime causes far more economic damage and kills far more people every year than street crime does and this has been true for decades. But because society focuses on street crime and gives the upper class the benefit of the doubt and punishes them very lightly, white collar crime is normalized. It is very difficult to change a situation like this because taking a behavior which is viewed as normal in a social group and changing it do that it is viewed as deviance is not something we know how to reliably do. This is a serious problem with no real clear solutions. We know that deterrence does not work, at least not in terms of making larger punishments and assuming that will reflect in fewer people committing the act. Certainty of getting caught is usually effective, but the monitoring of these sorts of markets would need to be done by exactly the people most likely to collude with violators. Until a person busted for insider trading or cutting corners on safety regulations or releasing products are earnestly made to feel ashamed and shunned by their intimate social group, I don't see much hope for change.
- carapace 9y agoI'd say you're seeing the "hope for change" right here. These studies and others like them are shining a light on our hypocrisy. Sometimes it's a single researcher or even an amateur. And then there are the leaks, like the Panama papers, the British Virgin Islands leak, LIBOR scandal, etc.
- marnett 9y agothe status quo is very powerful. unfortunately, things like these don't change - not without revolt.
- tomcam 9y agoThey should study Congress, where it is not illegal
- tankenmate 9y agoAnd the people who can consistently do insider trading are also the people who can use parallel construction to justify their trading decisions. For every possible trade there are advisers out there for both sides of the trade, if you already know which side is going to win all you have to do is listen to your own choice of advisers beforehand. "Yes your Honour, I talked to Fred from Conveniently Biased Advisers LLC three days before the event. He assured me that this trade would benefit me, so I made the trade."
- kerkeslager 9y agoCan you point to an example of parallel construction being (successfully) used as a defense in an insider trading case? If the prosecution can prove that you had insider knowledge, it seems like the availability of non-insider knowledge isn't relevant because literally everyone has access to non-insider knowledge (that's the definition of what makes insider knowledge--that not everyone has access to it). I've heard of parallel construction being used to prosecute in criminal cases with illegally-collected evidence, but never as a defense. That said, I'm not a lawyer and I don't follow case law in that much detail, so I wouldn't be surprised at all if this has happened.
- pfranz 9y agoFrom the little I've seen about the law, very rarely are things air-tight. For jurors in all trials, they often talk to them about the "CSI effect" where the average person assumes to convict there's tidy, irrefutable forensic evidence. I can see how parallel construction allows someone to lean on that and help blow off any possible exposure to insider knowledge to avoid the burden proof necessary to convict. White collar crimes have always been notoriously hard to prove.
- refurb 9y agoI would guess the ones who are smart enough to "parallel construct" are the ones that don't get caught? The SEC looks at trading history when investigating insider trading. Never bought stock X, but 3 days before a merger you bought a ton of out-of-the-money call options? You bet the SEC will be talking to you. Have a history of investing in a sector and make a not-out-of-the-ordinary large purchase of stock 3 days before the merger? The SEC might just choose to go after the bigger fish.
- overcast 9y agoStep 0: Forget trading on the stock market. You will lose. Step 1: Pay off your high interest debts. School loans, credit cards. Step 2a: If your company matches a 401k, take advantage of free money. Max out their contribution. Step 2b: Go to vanguard.com, open a Roth IRA, choose a Vanguard Retirement that matches your retirement date, dump $5500/year in until you're 50, then $6500 after that. Step 3: After emergency money is handled, take excess invest in the following index funds at Vanguard. Admiral shares require minimum $10,000 in each. However you can start with the standard share version, and then move them to admiral once your balance reaches $10k. 56% Total Stock Market Index Admiral Shares – VTSAX 24% Total International Stock Index Admiral Shares - VTIAX 20% Total Bond Market Index Admiral Shares – VBTLX Enjoy your millionaire retirement status.
- deleted 9y ago[deleted]
- zitterbewegung 9y agoSo, if you don't have a job where you can put away $6500 a year into an IRA and max out your match with a 401K are you screwed?
- overcast 9y agoI mean, it takes money to make money. It's also not required to max anything out. If you can only put $10 a week into retirement, put $10 a week into retirement, until you can put $15 a week.
- dabber 9y agoI'm honestly not sure why your getting downvoted. Maybe the "takes money to make money" line? Otherwise that seems like reasonable advice. If you can't max out your IRA every year then that's just how it is but it's certainly a good idea to contribute what you can. Right? Could someone shed some light if I'm missing something?
- 9y ago
- Dowwie 9y agolinks to the two studies cited in this article: The Relevance of Broker Networks for Information Diffusion in the Stock Market https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2860118 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2860118 Brokers and Order Flow Leakage: Evidence from Fire Sales https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2991617 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2991617
- Havoc 9y agoYou need a study for that? They're literally making TV series out of insider trading (Billions). Everyone knows it's rigged, but that doesn't mean you can't make money.
- kingkawn 9y agoI am stunned that absolutely anyone has ever thought that it was otherwise
- verytrivial 9y agoIn other news Pope in Catholicism Shock.
- deleted 9y ago[deleted]
- PricelessValue 9y agoWhy do we need academics to tell us? Go ask wall street. Go work on wall street. It's not a secret. There is a reason why the most valuable commodity on wall street is information. We know insider trading happens. Just like we know price collusion ( libor rates or lysine price fixing ) happens. If banks are colluding on something as fundamentally important as libor rates, then everything and anything is happening.
- mruniverse 9y agoI think the issue is that they can show that it's happening with data. And only after that, can solutions be suggested. And the solutions would be systematic ones (changing trading laws).
- lettergram 9y agoMy startup is actually targeting tracking "insiders", currently the working project name is a bit different: https://projectpiglet.com/ https://projectpiglet.com/ Although I have parked the "insideropinion.com" domain: http://insideropinion.com/ http://insideropinion.com/ It turns out, that although there are a lot of insiders trading, people on the internet love to talk about their companies. Recall the last time you saw, "I work at Google?" on Hacker News? That being said, I use it to trade regulrarly and similarly make money. Although I would reocmmend diversification as the top comment here currently says.
- anigbrowl 9y agoI'm perplexed that virtually all the comments are accepting of this state of affairs and focused on retail investment strategies, and so little given to the implications of how the public will respond to this information..
- emodendroket 9y agoNot that I'm happy with it, but I am not surprised by this claim.
- ironic_ali 9y agoThe public won't respond at all in any meaningful sense to the perpetrators. There will be some grumbling about how terrible it is and then it will be forgotten. HSBC laundered money for child trafficers and drug cartels, then the British government stepped in, gave a pathetic fine compared to the profits they made and nothing else happened. No one went to jail and the politicians that saved HSBC "in the interests of global sfinancial stability", got voted back in. It's sickening to the few, but the majority will always vote for the status quo. The rest may grumble at the MSM headline (never repeated after 2 days), but will do nothing. TPTB treat "the plebs" like cattle to be milked and it keeps working for them, so why change.
- anigbrowl 9y agoI agree in large part, but as evidence of corruption mounts so does public dissatisfaction. Outrage is temporary but dissatisfaction is cumulative and can, I believe, be channeled.
- brownbat 9y agoBefore getting outraged I try to apply the Matt Levine test: insider trading is about theft, not fairness. The first study talks about investments during TARP. The premise of TARP was that credit markets were seized by irrational fears, and government investments could reestablish normalcy. It doesn't say what strategy those with government connections used, but... I wonder if we should be angry at people who defied the trend and were rational even before the government did anything. Maybe we want things like TARP to work, but not too well or too early. Certainly not with the help of anyone willing to accept the risk that the policy process might swerve at the last minute. The article then begrudgingly admits a benign explanation for the second study. Brokers looking for buyers or sellers naturally leak information. It turns out it's hard to try to sell something when you never ask anyone if they are willing to buy it. On the other end of the line, people who suddenly get offers to buy or sell a thing might change their mind about its value. That's not so much insider trading as it is how all markets work. Here's some more, from a far better writer than me: https://www.bloomberg.com/view/articles/2015-04-01/another-politician-wants-to-ban-insider-trading https://www.bloomberg.com/view/articles/2015-04-01/another-p... https://www.bloomberg.com/view/articles/2018-01-03/bill-ackman-s-allergan-insider-trading-dispute-doesn-t-look-bad https://www.bloomberg.com/view/articles/2018-01-03/bill-ackm... He also writes about Bitcoin if you're into that.
- adultSwim 9y agoNo shit. There are party lines you can call that connect up company insiders with traders. So much money is on the line. There's a huge incentive to buy information.
- jacknews 9y agoNice to see proof of what everyone already knows.