We are perhaps the only public company that shares financial results internally in the weeks before the quarter is closed. We announce these numbers at a quarterly business review meeting with our top seven hundred or so managers. The financial world sees this as reckless. But the information has never been leaked. When it does one day leak (I imagine it will), we won’t overreact. We’ll just deal with that one case and continue with transparency.
The CEO of Netflix says this in Ch 5 of his book No Rules Rules. The leak is a predictable result and will happen again. He believes the tradeoff in openness is worth it. If this $3 million is the only incident, maybe he is right.
IMO it’d be great if going public meant that you had to publish open, online, real(ish)-time dashboards of your company’s core metrics. Like if it’s a metric in every quarterly report, it goes in the public dashboard, and has to be no more than X stale (1 hour? 1 day? Something like that).
Many public companies already have something like this internally, it’s just really locked down. Open it up and most insider trading goes away.
There's a lot of work that goes into verifying the numbers before they're reported, and you really can't do that on an hourly basis, and a daily basis would really be pushing it.
Generally Accepted Accounting Principles aren't always entirely straightforward to apply; you can't just look at the bank balance every day, and internal dashboards don't have the same rigor that reported data must have.
Besides, it would allow competitors to do a lot of spying: When did you sign some contract (with hour precision), is the customer base weakening. It’s not only the same data being published, it’s n million times the same data with all its variations. If I were Amazon, I would spend a lot of money convincing the competitors’ employees that openness is essential.
Yep, and if you issue the wrong number, your company is legally obligated to issue a correction, done in an 8-K usually I believe. And this is very much frowned upon by investors (not the correction, but making the mistake in the first place).
How does investors dissatisfaction with a company making such mistake manifest itself? I assume they won't divest just for the sake of punishing the board.
They may not simply for punishment but because they lost trust in the company's ability to accurately report financials (depends on discrepancy in financials, # of misreports, etc)
Quite a few of board members are the investors, if I understand it correctly. As for how their dissatisfaction could manifest, they could vote the CEO out and put someone else in that position who will revert that level openness instantly.
Yeah, they’d have to be quite tentative numbers, not held to the same level of scrutiny as quarterly report numbers. I actually used to be a data engineer, working on internal BI stuff, and worked a tonne with our finance team automating all sorts of their previously manual work. A massive amount of it was automate-able - humans had to make decisions about how we’d recognize/classify different types of revenue, but once those decisions were made, automating their application wasn’t hard.
It’d be a lot of work, but I certainly think doable for most businesses.
This seems like it could make public companies even more short-term focused. Execs would be wondering on an hourly basis what stockholders, etc. are thinking about metric fluctuations.
I'm no financial expert, but it seems this would uber-stabilize the stock since algorithms (ingesting via scraping or human data entry) would trade near-perfectly based on the statistics, leaving little speculation for retail investors/other impulse trades.
That assumes that everyone, and every algo would take those metrics and translate and interpret them into a consistent share price. The value of any company, is only loosely linked to it's performance at any given point in time, and is highly dependent on assumptions (eg. rev. vs. cost growth) over time.
This would reduce the information disparity between insiders and the market, there's still plenty of room for speculation.
Until there is a “fluke” in the data. A bug, or an exceptional change. Things that would normally be corrected in the manual GAAP process before reporting.
But now all the algorithms crash or bubble the stock price and a lot of people loose money.
I’d love to see such (near-)realtime metrics though
No, because even assuming an efficient market, future earnings are still uncertain, people will have different opinions about them, and that's most of the ballgame.
Great idea. Although it is probably unrealistic for accounting data (profits, losses, cost of sale, etc), other types of data are indeed likely already present in internal systems with at least daily resolution: number of live accounts to show signups and closures, median watch time, total number of hotel bookings made, mining ore yield, vehicle occupancy and miles run for logistic companies, number of cars serviced, etc.
SEC could make a list of required realtime reporting metrics by industry and mandate this information to be published with delay no more than X days.
Honestly it seems like a win-win. Anyone trading on the information is likely to be caught and I doubt they want someone in a position of power who would commit that sort of crime.
As far as I can tell the company isn’t legally or financially liable so I don’t see a downside?
Aren't Netflix essentially enabling market manipulation (which insider trading technically could be a part of) which surely must violate some sort of legal codes (maybe even for the directors of the company! I.e. in Australia we have laws around "Director Duties" where as a director can be held liable for all kinds of behaviour when it reaches a certain scale incl. honesty, debt, insider trading etc.)
I don't think this was a leak from the QBR. The QBR goes into a lot more detail around finances etc. Sounded like this case the person was just trading off of subscriber data, which has other sources besides the QBR.
"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.
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.
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?
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...
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.
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 it was simply the timing of the trades with the timing of earnings reports. If this happened multiple times over a couple years it just raised some eyebrows enough to start an 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.
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.
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.
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.
> 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.
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 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).
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.
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...).
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.
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.
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.
>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.
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.
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?
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.
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.
> 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.
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.
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.
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.
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.
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.
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.
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.
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.
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?)
That particular piece of code is too verbose and I believe will not even be particularly more efficient (even for very large arrays); BUT, the idea behind it, i.e., recklessly loop and just catch the exception is the most idiomatic way of both looping over collections and checking if one item exists in Visual Basic. It is, in fact, the most efficient general (works for all kinds of collections) way to check for "item x is in collection C" both in VB and python.
A few simple timings tell me this isn't actually fast in Python for finding an item in a list, compared to a bounded loop, (and, since I was curious, neither is a sentinel approach where you insert the expected item at the end of the given list), I guess CPython just heavily optimizes range-for loops, and maybe this was true in an old version of it.
That is why I put the word "general"; C could be a dict, etc. I know that there are better ways for specific types, but the following code is a snippet that works for fast prototyping and I have found it to be idiomatic in VB for collections (but I do very occasional VB, less than once a year).
# pythonic pseudocode
def exists(x, C):
try:
C[x]
except:
# could be more specific
# IndexError, KeyError, etc...
return False
return True
Here's what I don't understand: How does knowing the growth numbers actually translate into an actionable buy-or-sell plan? To my naive eye, the market effect of key metrics always seems fairly random. And besides, in recent memory, all the FAANGs have been reporting positive numbers for all metrics, with just a few exceptions.
I mean it's like, here's my "insider tip": FAANGs saw usage and revenue growth this quarter. Ok, now are you gonna make money off this secret info?
There are numbers attached. FAANG saw growth of X%, which is above/below expected growth which analysts projected at Y%. There's an entire industry that's dedicated to calculating Y, it's not a back-of-the-envelope calculation that took a couple hours or a weekend. If X is > than Y, buy shares and sell them after. If X is < Y, short them instead. You can also gamble on their competition's stock rising/falling on the news if they're also publicly traded.
I’m financially illiterate, ignorant, and as a result my net worth is not significant, but I was excited to actually know this answer. Maybe there’s hope for me!
If this stuff is something you want to learn a bit more about, Matt Levine at Bloomberg has a great newsletter called Money Stuff which I highly recommend. Despite an expert level of understanding, he breaks things down in a relatively easy to understand say. He worked at Goldman as an attorney before becoming a writer. He goes through a few topics per day, writing about weird things happening in the market. Mergers and acquisitions and the hiccups along the way, market incentives that lead to odd and unintended outcomes, and probably his favorite topic, insider trading.
"Earnings surprises can have a huge impact on a company's stock price. Several studies suggest that positive earnings surprises not only lead to an immediate hike in a stock's price, but also to a gradual increase over time. "
If growth numbers are higher than expected, you can buy stock now before the numbers are released. When they announce the true numbers, the stock will probably rise and you will make money.
but half the time the headline is "X Company beats expectations, stock slides anyway".... unless these are super outliers, it seems like the effect on the stock can be random
If it was truly half the time you would be right. But in reality it is less than half the time, so you can still come out ahead on average across multiple trades.
The example quote you give does happen of course but you tend to remember those cases more than the more common beats-expectations-stock-rises cases precisely because they feel more unexpected.
It's still not random. Usually those headlines are followed by articles in which a negative aspect that was found in the released numbers is detailed.
Like Netflix beating revenue and earnings expectations, and even beating new subscriber number expectations, but subscriber growth in a key market slowing much more than anticipated.
If you know all these numbers, you can screen them for potential negative catalysts that might counteract the positive effects of expectation beats. If you find none, you can relatively safely assume that the stock price will probably pop after release.
Outside analysts, working for banks and other financial firms, using public/non-insider data, will write up a report about what they think the numbers coming out of Netflix's quarterly earnings report will be, to try to predict how the stock price will be affected by the report. This is why sometimes you see amazing, other-worldly quarterly performance, but the stock price doesn't move at all- because everyone had already anticipated the performance and that had already been priced into the stock price.
So if you have subscriber growth numbers - you look at where the analysts get something wrong as part of their calculation. Maybe they think there will only be 1M new subscribers, but in reality there are 10 million.
We suspected (more than a decade ago and the relevant bug has been long-ago fixed) that some research firm was placing orders at the start and middle of each quarter. These were suspicious orders as it was for a customizable product but the customer was not customizing anything (where the customization was the majority of the value). The orders were going to New York, always paid, never any chargebacks, no apparent credit card fraud, or complaints to customer care.
Looking into it, the only thing we could figure is that we were leaking an incrementing integer as part of our manufacturing process and the customer was apparently willing to buy small orders to get access to that ID (and thereby estimate order volumes).
We changed the process to not leak incrementing IDs and the orders stopped after a short time.
The leak was that we generated an auto-incrementing integer order ID and printed it on the inner pack label.
There was part of me that thought about fixing the situation by first adding an extra ~25% bump to the mid-quarter and ~35% to next start of quarter (by incrementing the ID column with a patch). We obviously didn’t, but it was fun to contemplate.
I actually admired the lateral thinking if it was a hedge fund doing research.
Generally speaking, if you significantly beat analyst expectations, stock price goes up, and the reverse if you’re significantly below expectations. If you knew the numbers about to be reported tomorrow were, say, well above analyst expectations, you could buy now and get a reasonably consistent return.
“Usage and revenue up” is already priced in, if that’s the expectation. But “usage and revenue up much more/less than expected” will have a reasonably consistent effect on stock price.
While others have contributed valid points, I think there is another key point here - Netflix stock price is (or was) strongly correlated with that quarter's subscriber growth.
In other words, this might be a method that only worked with Netflix stock in that timeframe where sub growth and stock price is strongly correclated.
It's a matter of comparing growth expectations from analysts with actual numbers. If the actual user growth is higher than the average analyst expectation, you would buy stock/call options just before earnings; otherwise you'd short the stock or buy puts.
It's if it's higher than street expectations. They don't necessarily match analyst expectations, so it's a harder bet to make than you'd think. It's really only easy for a big beat or a big miss.
Perhaps, I am a bit naive, but what qualifies as insider trading?
If I work at a company, I am bound to know things that are not public knowledge. This means that any trade I make is technically insider trading.
Example: I am an engineer, working on a new unannounced product which I think will do well. I buy shares of my company in advance of the release of that product. A few years later, after the product has shipped and delivered the expected gains, I sell my stock.
Typically publicly traded companies have trading window limitations for its employees, and one purpose is to avoid insider trading risks. But that works for “normal engineer”. Executives who have more privileged info might need to consult their lawyers case by case.
One common approach also it to have auto-sell, which will automatically sell your stock on a schedule which is set long in advance, so there's no suspicion of insider trading. Honestly I think that should be the only way to sell stocks of your own company, either that or schedule a sale at least a quarter in advance.
I remember insider trading being roughly defined as "trading on non-public information which can be considered to be relevant to the share price" during our company training. At least in our company, most of the non-public information that the engineers have isn't really going to rock the stock price, since it's usually just feature additions to existing products. I imagine it'd be quite a lot different if you were working at for example Apple and knew that they were going to release a whole new product (and not just the iPhone X+1).
My biggest giveaway from the company training was to just avoid the company stock. Life is much easier that way.
>My biggest giveaway from the company training was to just avoid the company stock. Life is much easier that way.
That has always been my approach, but I also have never worked for a company that routinely gives stock to employees. Having a tilt in your investment portfolio towards your employer is a big risk concentrator (company goes downhill, you might get laid off at the same time), not to mention the potential issues with insider trading or the appearance of insider trading.
Good question. Same thing applies if you decide not to sell your company’s stock because you have confidence in the internal roadmap.
However, at most companies, there’s a segment of data that is kept more confidential, and those people with access have more guardrails on their trading. Netflix is an exception in that most of their workforce is “insider” and thus financial data such as what was shared within this indictment is more freely available.
"This case reflects our continued use of sophisticated analytical tools to detect, unravel and halt pernicious insider trading schemes that involve multiple tippers, traders, and market events."
Lol, I don't think there's a lot of sophistication in this. They want to make it sound like some sort of powerful magic box they have that can find anyone doing something dubious when in reality this is probably a very simple interesection between two datasets:
The one that contains all the people who yielded profits over X amount when trading the stock of a Y company during a timeframe, and another dataset that contains all the current and former employees of that Y company.
That's the thing about insider trading. People who do it are just complete idiots. They think that they can leverage some assymetry of information when in reality there's no such thing. If you trade the stock of your current or former employer (especially before earnings calls) and yield unrealistic gains you're going to get flagged and someone is going to manually review your shit.
I happened to have a set of standing instructions for a number of technology companies which consisted of buying stock when it dropped more than 5% below the 90 moving average, and selling stock when it exceeded more than 5% the 90 day moving average.
For a lot of tech companies this was basically a money pump since they rose and fell quite cyclically. Then I went to work at one of the companies on my list (NetApp) and one quarter EMC announced they were going to miss their earnings and all storage companies dropped. Two weeks later NetApp announced their earnings which were better than expected.
When I got my brokerage statement for the month I had a nice gain because they had bought NetApp on the dip, and then when the earnings were announced the stock went up so they sold the shares that had been bought. About three weeks after that I got a call from the SEC. I referred them to my broker which showed both the standing order, and that they had been in place for a couple of years before that event, and the SEC went away. However I did take NetApp out of the mix because, well it is always unnerving when your phone tells you the SEC is calling. :-).
I met my financial planner when she cold called me at Sun.
She worked for the company handling Sun's employee purchase plan and stock option plans. I've stuck with her as she he moved from company to company (generally by acquisition). Establishing a standing order was simply a matter of calling her up and telling her what I wanted to do. I'm not sure how it was implemented on her side though.
Not really. Basically the basic calculation I make is what is my time worth vs what I'm paying in management fees. I've been pretty happy and the managed assets have consistently out performed the S&P 500[1] even after accounting for fees.
Everyone is different of course, I'm not a min/maxer trying to eek every cent out of my investments. My goals are/were around not having to work if I don't feel like it. I do understand people who use their net worth as some sort of 'score' they feel they need to 'win.' That is not who I am.
[1] I basically consider a zero fee robo-investment strategy in specific ETFs as the 'null hypothesis' here. If the team out performs that, it is okay, if they don't we need to talk.
I find it hard to believe this strategy works with any kind of long term horizon. This story reads like easy money. Tell us about some of your losses.
My old man always taught me: People love to brag about their wins (in the stock market), but rarely share their losses. The best traders know: You learn the most from your losses.
If this strategy is so good, why don't you run a prop trading firm doing exactly this? And do you run the same strategy for oil, natural gas, soybeans, and pork belly futures?
He wasn't bragging about it. He was just mentioning it because it had a side-effect of bringing the SEC onto him.
"If your strategy in trading microelectronics stock (largely hype-based and that you have an intuitive understanding of) is so good even though you didn't actually claim it as being all that, why don't you run the same strategy in trading pork (no one has ever gotten hyped about pork)?"
I interpreted the story as humble bragging. Too many HN stories-of-convenience are nothing more than humble bragging. It would have been a much more impactful comment if he spent the second half talking about serious losses and learning a lesson.
Every time I post about how I'm bad as something or made a mistake, then learned a lesson, it is followed by a bunch of humble braggers telling stories-of-convenience about how they avoided such an "obvious" mistake.
Finally, let me share yet another of my lifetime fails: During 2008/2009, I was convinced everyone was wrong about risk management at huge investment banks -- subprime mortgages and synthetic CDO^2! I was thought they were infallible, filled with financial maths geniuses would could navigate any financial storm. I was dead wrong. I was shocked when Goldman's legendary Global Alpha fund CLOSED after massive losses. Could. not. believe. it. It's still a bit shocking to write, because their record of outperforming the S&P 500 using partner money was the stuff of legend. And, yes, I lost so much money against Bear, Stearns & Co. and Lehman Brothers. Ouch!
Agreed they weren't bragging about it, but it is worth pointing out it's a horrible strategy and will probably produce a net loss over time unless you happen to be incredibly lucky.
>it's a horrible strategy and will probably produce a net loss over time
I dunno. Too many variables to dismiss as horrible out of hand. For one, it depends on the actual companies involved.
Also depends on exactly how he executed it. If the stocks followed the typical average of 10% YoY gains as the rest of the market, then there's a way to execute this strategy wherein he wouldn't lose by definition. For instance, he might set a mark on the sell side to ensure he's not selling at a loss vs. his last buy.
Now, he might get stuck holding the stock for some time (especially after a big downturn) and that might incur him some opportunity cost. But, that wouldn't mean a net loss if he was willing to wait. And, that'd be no different a risk than, say, a typical buy and hold strategy.
> I find it hard to believe this strategy works with any kind of long term horizon.
You are correct, to an extent.
It breaks when the stocks in question continue to go down. I happen to be a really conservative investor (I tend buy and hold, never got into the whole day trading thing during the dot com rush). Given that each 'up' blip was essentially a 10% gain on my investment (approximately) the cash gain would be banked[1] when it sold and there was a 20% stop loss[2] sale as well. But with a very cyclical stocks the returns were pretty steady.
I added the stop loss after I found myself holding stock that just became more and more worthless after the dot com crash. (when you buy on the dip and the dip keeps right on going :-). It is also the reason I had Agilent stock for a while in that I was holding HP stock when they spun off Agilent, the HP sold when it continued to tank and there were no instructions on the Agilent. So between 1990 and 2005 when I had this in place I think the annual rate of return on that part of my portfolio was about 8%? The crash wiped out a lot of gains that took a while to undo (I think if I had sold off what I was holding in 2001 it would have been like 2% annualized gain over the 10 years.
Note, I have never been, nor aspired to be, an "elite" trader. It was in 1990 when I had about $1500 in my brokerage account that was just sitting there in cash and I wanted to something more interesting with it than put it into a bank CD. Hence my foray into "algorithmic" trading :-).
[1] That cash was taken out of the pool, it wouldn't be re-invested on the next dip.
[2] Stop loss -- a 'good til cancelled order to sell a stock at the market price if it's price falls below a set value.
For the same time period, if you had put all your money in an ultra low fee ETF that tracks S&P 500... I bet a lot of money the ETF strategy would easily outperform.
Twenty years ago, I used to closely read articles like ... <<<Miller's Legg Mason Fund Beats S&P 500 for 15th Year in a Row>>> Before I understood more about "finding alpha", I assumed you could find an active manager as a retail investor that could beat S&P 500. With age & experience, I no longer believe it true. Legg Mason beat the S&P 500 for a long, long time... but if you look closely, they only beat by a little bit. Then one year they got crushed and gave back all their winnings and trailed S&P 500. Plus you paid active management fees for 20 years. In the end, investors didn't beat S&P 500 over the long term.
It was crushing for me when I put all the pieces together. For so long, I believed I could outsmart the market as a retail trader by finding the right active manager. After that, I never looked back -- 100% ultra low cost passive index trackers against WIDE, well-established indexes, so I'm not "stock picking" by another name.
FWIW I went through a similar "education." For roughly 3 months in 1999 I had a combined restricted stock (already granted with an 83b election filed but vesting over time) and incentive stock (fixed strike price, 1 year cliff, .25%/yr thereafter) options in a single stock that in 2003 (4 years later) if the stock was trading at the same price as it was in 1999 ($120) was "worth" $12,000,000.
In 2001 that stock was trading for $0.83/share[1]. And while I didn't have any opportunity to sell it, being an employee and all, what really pissed me off was that I had Sun stock that I could sell that would have been worth $360,000 after taxes (which would have paid off my mortgage). Instead I rode that stock down to about $9000 when Oracle bought them.
Similarly my 401k savings account, that I had put in the max amount every year for decades, had under-performed the S&P500 and even some lousy mutual funds.
So yes, I've had my share of ups and downs, and yes if I had put all of the money I ever had in my brokerage account into an SPX ETF I might have more in it now than I do.
But here is the thing for me, and perhaps spending my teen years in Las Vegas warped my perception of money enough to make this possible, I recognize that the equities market is essentially "random" and various studies have born that understanding out in the large view. As a result it doesn't "feel" to me like I somehow lost money through my own actions, it feels like the bet I made didn't pay off. That is a different approach than getting emotionally invested in the financial outcome of investment decisions. When I came to understand that I was not going to spend all of my time reading financial reports and resumes of senior management like my Dad's ex-swiss banker friend does to get an "edge" I had two choices, go the ETF route or let my financial manager manage some of my assets.
[1] At $0.83 that was about $40,000 in the restricted stock (nobody exercises their incentive stock options that are underwater :-), And yes, I recognize that $40,000 is way better than nothing, and because of my 83b election I have a long term capital gains loss that I can claim for $3,000 a year on my tax return every year and that will continue for the next 75+ years if I were to live that long (I won't).
Like most strategies it works until it doesn’t. If you’re on margin it will stop working more quickly. However it’s more likely a stock with the right beta will oscillate like this fairly often and let you make your small gains. But you also miss out on the big gains and also are left holding the bag when the stock drops 50% overnight on some news.
It’s a classic “picking up nickles in front of a steam roller” strategy. But it could work for a really long time. Until it doesn’t.
It's probably a good thing you removed it, because I bet if the SEC were bothered enough they could argue that NOT changing your standing order is possibly informed by insider knowledge. No idea if that is actually something they'd try to argue though.
Hands-off standing orders are typically fine with the SEC and are actually preferred to actively trading if there's even a remote possibility of being exposed to insider info. But, I'm not a lawyer and this isn't advise. Talk to your lawyer and investment advisor about any compliance issues.
The problem is unless they account for it, their trade could trigger during a 'blackout period' (before earnings) when they shouldn't be executing any trades at all.
Blackout periods have no SEC standing. They're purely a construction by your employer to avoid the appearance of trading on MNPI. Standing order trades (e.g., rule 105b-1) can execute at any time relative to earnings.
Not quite. Most executives and board members have standing orders for their own company (usually sell x amount every y days), this way they can’t be accused of doing something illicit.
There is a bit of a grey area with respect to insider trading and cancelling a standing 10b5-1 order and the SEC has recently commented that they’ll be looking at those foregone transactions with more scrutiny in the near future: https://corpgov.law.harvard.edu/2021/06/25/gensler-plans-to-...
They should have removed all orders the day they became an employee.
I know high frequency trading firms that are heavily inconvenienced by insider knowledge. They have to shut down so many things. Securities Insider trading is really tricky in the US as it isn't a specific law specifically about insider trading, only a bunch of court cases by the securities regulators that they sometimes won.
I'm confused by this sentence: <<<I know high frequency trading firms that are heavily inconvenienced by insider knowledge.>>>
Normally, HFT firms don't care about insider trading. They are trading "noise" -- finding signals from past and present trading activity to make small bets that are 51% likely to be successful. They manage risk very carefully. This is not a secret. Cliff Asness from AQR Capital has given multiple long-form interviews on this topic. You can Google to find podcasts and printed articles.
On the other hand, long-short hedge funds, such as Steven Cohen's legendary Point72, love insider information! It is the backbone of their business model. The best ones employ an onion-like defense strategy to launder inside information as legitimate analyst reports. Only the outermost layer is directly transacting in insider information. As the information moves closer to the center -- real traders -- it is carefully masked to hide its origin. The SEC was never able to catch Steven Cohen, but they caught many, many people around him and eventually forced his original fund to close.
HFT firms don't care about insider trading. If they get exposed to it anyway, they have to shut down their active trading in that specific security for some time, and exclude it. Its not the only thing many firms do.
In practice, there is no way to reliably know why a stock is changing price. There is lots of insider trading that is so small it does not materially impact the trading prices. As of date, there is no scientifically reliable way to measure "market impact" real-time. I assume the best HFT funds are trying to do this using AI/ML.
Right, and that’s not a factor in insider trading charges.
If a firm - that also has an agnostic active trading strategy - gets any inside info they have to cut the active trading strategy for liability reasons. That’s a conclusion some firms have made, not whether the SEC will actually bother them in a quantum reality or whether they can successfully defend it.
I assume you mean Renaissance Technologies. I categorise it as pure HFT. They are not taking long-short technical or macro positions in their main fund -- that I know. (Others: Please correct me if they have other funds, or changed strategies in last few years.)
That said, RenTech was under intense scrutiny by SEC and IRS for their incredibly aggressive tax strategy. I did not follow it to the end.
First: Yes, Medallion fund is the primary fund of RenTech.
Second: To me, stat-arb can be HFT or non-HFT. They were/are doing HFT stat-arb in Medallion fund. AQR, Virtu, and Citadel are probably doing both HFT and non-HFT stat-arb. Twenty years ago stat-arb was called "pairs trading". Today, it is much more complex: basket vs basket.
An interesting question. I was a Technical Director at NetApp which isn't a corporate officer (that is VP and above), and wasn't an identified insider (there are forms to file for that). NetApp had a policy against employees trading stock during "blackout" periods (typically two weeks before and two weeks after the earnings announcement) but were okay with and knew about my 'programmed' trades.
I think the SEC could have probably made a case that it was possible for me to know that NetApp's results were going to be better than the street expected (I didn't know that but I did know we weren't hurting like EMC was). And the money involved was small. I expect it was the timing more than the amount that triggered their call.
I was surprised I didn't hear from NetApp's general counsel at the time (I'm sure they were notified).
So if I said nothing? That would probably trigger a closer inspection. Sure its my right to not speak to them, but doing so would have probably made them more suspicious. And frankly, I have seen so many times when people trying to be "tricky" got into more trouble than if they had just been open with what was what that I have rarely felt tempted to push back on that sort of thing.
If you can prove you didn't do a crime, seems like pointing out why is going to be in your best interest if the fuzz comes calling. Remaining silent is sure a good idea generally, but this seems like one of the rare cases where I don't see the point.
I'm surprised they got to you that quickly. Having worked in finance most of my career, some of which involved fielding SEC inquiries, my impression is they are way behind enforcement. Although, to be fair, usually the inquiries I was fielding were more to do with spoofing and manipulation, not insider trading.
I know a few ppl in compliance at different exchanges, they move pretty quickly if they think it’s a one off, if it looks like it’s part of a larger game they’ll be more methodical. But this sounds pretty standard, it looked odd but not too odd so just warranted a quick call.
It was a while ago, maybe $4,000 - $5,000 ? I was definitely not more than $5,000. As I said above, I think it was more the timing than the amount that got them curious.
I expect none do, and this was probably implemented through a financial advisor who either has their own bespoke system for doing stuff like this automatically, or perhaps something more manual, like setting price alerts and then having a team of people react to them.
Insider information isn’t guaranteed to let you predict the stock price. You are much more likely to actually make money with multiple small bets than any one big bet.
Through insider trading, Martha Stewart avoided a $45,000 loss.
She lied repeatedly to investigators saying among other things that it was a pre-arranged trade. The person that tipped her off admitted everything though.
She went to jail for lying to investigators, obstructing justice, etc. And still had to pay a $195,000 civil fine for the insider trading!!
Just to correct my last comment, after looking up the case, it seems Martha Stewart was actually not found guilty of insider trading. She was found guilty of lying to investigators.
The SEC will send a list to your compliance dept if they see weird trades (e.g. short-dated out-of-the-money calls) and ask if anyone on the list works there. The compliance dept also has a list of people with material non-public info and they get the list of people who made weird trades with the question “do you know any of these people?” If you know one and you didn’t provide them info then you say so because the implied threat is they’ll find out either way that you know one of them.
That's not exactly true, but to use a turn of phrase - close enough for government business! [1]
The lie is a felony but only when connected to a federal matter. [2] [3] [4]
[1] This used to mean (many moons ago) something of very high quality. However, as our government became ever more like what is _now_ our government, the idiom took on the opposite meaning: good enough to say it's done, so we can move on from it. It's also used to say when something is correct for the discussion but not in the broader sense. Source? My neighbor the FBI agent told me, and I've heard it in action many times since then.
Because they made over $3 million probably having done little to no trading prior to that run.
Pretty much anyone could spot insider trading patterns. I’d be willing to bet these guys were making bets only on Netflix in the form of short-dated options most of which typically expire worthless. If someone were to repeatedly aggressively buy low probability short-dated options around an event like earnings and win consistently you would be able to infer that they are trading on insider knowledge.
Of course recognizing the pattern is only half the battle. They also have to figure out how they are accessing the inside info, hence tracing the traders back to Netflix employees and conversations they had regarding paybacks, etc.
not enough to know the numbers, u have to know how market will react. I have seen many times a company post huge numbers that beat estimates and not go up much.
There's a "simple" solution to that: don't lie about it. If the SEC comes knocking on your door, refuse to talk to them until you've had a chance to consult with a lawyer, and then do what the lawyer says.
The thing is, 1 million is a pretty cheap price to sell your integrity. If you do get caught, you got caught over a relatively small sum. Once you've gotten your hands dirty, why not go all in? Why not go for James Bond villain money?
That's not rational, of course, but humans aren't rational.
You don't always have that option, rarely does someone say "Hey, I have a plan to steal unlimited amounts of money, do you think we should steal $1M or $100M"
Besides, unless you're already wealthy it's harder to hide the theft of huge sums of money.
It's worse than that. It's also something similar to no true Scotsman, because presumably the act of getting caught is the only piece of evidence used to argue that they're complete idiots.
“ This is selection bias. The people who get CAUGHT doing it are complete idiots.”
I used to know a Wall Street guy sometime around 2005. The way he presented it was that there is a ton of variations of insider trading going on. People talk to each other and insiders are always ahead of the general investors.
I tend to believe that. As creative , greedy, competitive and smart these people are I can’t imagine them not taking advantage of every opportunity they see. Also, in most other industries the regulators mostly go after the smaller guys because the big guys are too hard and expensive to prosecute.
Yea, I'd imagine if you have enough discipline (e.g. don't use your family to make the trades) and use tradecraft well (e.g. don't talk about it on slack or in text messages), it should be possible to get away with it. It would be neat to know how many hedgefunds do it and what process they follow to do it.
Congress critters are exempt from insider trading laws. Insider trading by congress (and their staffers and family) was briefly made illegal by the STOCK Act of 2012 [0] and quietly neutered a year later.
> If you trade the stock of your current or former employer (especially before earnings calls) and yield unrealistic gains you're going to get flagged and someone is going to manually review your shit.
There are a lot more sophisticated methods of insider trading. Just for starters, get someone else who has no apparent insider status to make the trades for you. It doesn't take a genius to come up with strategies like burying your insider trades in a much larger number of regular trades to make the profits less conspicuous, or getting fake blog posts written that essentially say to do exactly what the inside trader is planning to do thus creating a plausible explanation besides insider knowledge for an agents strategy.
It's like money laundering: the methods you see on TV are the simple versions that are easy for an audience to understand, they're not what people who have actually taken the time to come up with a strategy do.
Off topic but: watching cryptocurrencies move before recent legislation news (infrastructure bill) hit any public source confirmed to me that DC is the insider trading capital of the country. You dont even need to look hard...like Pelosi's husband buying Amazon calls right before they scored a large cloud computing govt contract. That was absurd.
They’re certainly not anonymous on FTX, you have to be KYC’ed both by the exchange and the institution doing the tokenizing. Maybe you can trade anonymously on a DEX somewhere?
Just being on FTX probably makes it much harder for the SEC to find the gains, though.
Exactly this. Especially in the 21st century world of big data, ML algorithms and all that jazz.
The closer you are to the action, the higher the chances of getting caught.
If you work for a finance firm, its pretty much guaranteed you'll be caught. Firms are hot on it and they take all sorts of layered measures to prevent it and stamp it out. If you work for a finance firm, in most cases its actually harder to obtain the insider information in the first place than it is to act on it as a PA trade. One of the most well funded and well-staffed departments in any finance firm is the compliance department and they have the power to kill your career instantly (you'll get escorted from the office the moment they suspect anything, forced to stay at home on gardening leave whilst they investigate and then once that's over - and assuming it doesn't go legal - you'll find nobody in finance will employ someone who was sacked for compliance reasons).
If you work for a listed company, then like these guys eventually found out, you'll be caught. A bit of data mining at the SEC will soon weed out transactions made by people who likely knew what was going on before the public did.
All this hard work on compliance makes the stockmarket one of the most even playing fields there is for investors, because the work of the SEC and other regulators around the world is there to ensure John Doe has the same chances as Warren Buffet to make money on the stockmarket. (Yes, the world of HFT is a bit different with their technological edge, but that's another story).
Compliance is a cost center. The Redditesque fantasy of compliance departments overflowing with resources because the company loves law for the sake of law or thinks that going above and beyond makes you less likely to get screwed than just doing what your lawyers tell you the laws says you need to do are just that, fantasy.
Compliance departments get tasked with making the company comply, nothing more, nothing less. And they're mostly given the resources to do that, nothing more nothing less.
For a start "company loves law for the sake of law". The company is operating in (a) a highly regulated environment (b) likely wishes to avoid the fines and adverse publicity associated with non-compliance. Its nothing to do with "loving the law".
I called the behavior Redditesque for a reason. Comments portraying regulatory agencies as all-seeing gods ready to smite anyone who dares not display their faith enthusiastically enough let alone materially violate the rules are wildly popular there. Cynical realpolitik takes (e.g. "MHSA will show up and fine you for everything they can while doing nothing to materially improve safety") on regulatory enforcement are very much unaccepted over there. Millennials and gen Z, exactly the people you'd expect to be the most cynical are also over-represented there compared to the general population. So clearly there's some other mechanism at play.
All this hard work on compliance makes the stockmarket one of the most even playing fields there is for investors, because the work of the SEC and other regulators around the world is there to ensure John Doe has the same chances as Warren Buffet to make money on the stockmarket. (Yes, the world of HFT is a bit different with their technological edge, but that's another story).
When Warren Buffet bought financial stocks in 2008-2009 the deals were done in such a way he could not lose money easily, or at least had a much lower chance than any ordinary investor.
> When Warren Buffet bought financial stocks in 2008-2009 the deals were done in such a way he could not lose money easily, or at least had a much lower chance than any ordinary investor.
Isn't one of his great sayings "be greedy when others are fearful" ?
IIRC the market didn't have much lower to go in 2008-2009 so if he bought at (or close enough) to "the bottom" then he wasn't really taking on much risk anyway.
Did it myself last year when COVID started and the market plummeted. Went on a shopping spree with some spare cash I had, lots of decent shares being effectively sold at a discount, all you had to do was "be greedy when others were fearful" ... pick something up at a 20%+ discount and then just sit and wait (and be prepared to wait a few months to a year). And with COVID it was pretty clear that as long as it wasn't an airline or hospitality stock, the odds would be in your favour.
Having recently left a fintech job for just a normal tech job I was surprised to find that 4 hours of mandatory insider trading training was not the standard.
Interesting. How far removed were you from regulated activities ? Did your firm and/or role have a retail facing element or only institutional ?
Most places I know of would not only have the sort of induction training you imply, but regular refreshers for anyone involved in regulated or at-risk activities.
We had the refreshers as well. We theoretically had access to fairly extensive private data. Not without leaving a pretty extensive paper trail, but the access was there.
I was going to mention HFT. How is it a level playing field when they are in the picture? Paying top dollar just to be closer and closer to the exchanges to get the fastest, "best price", when really, they have info before anyone else.
Also, what about dark pools?
Contrary to my username, which I just get a kick out of, I don't actually work on wall street or anything, but I've always felt the stock market was rigged for the elite. I think it is very likely that they have info before normal retail investors have any idea.
HFT is the best thing to ever happen to the average Joe retail investor. They have increased liquidity and price discovery dramatically at a fraction of the cost of the people they replaced.
At what cost are they providing this service though? They make a ridiculous amount of money doing so. Shouldn't the exchanges have offered the best price, and provided liquidity, in the first place?
Flash Boys: A Wall Street Revolt by Michael Lewis painted HFT in a pretty bad way. I have read criticisms of the book, but it's hard to separate out bias from the criticism.
There's also all the heat on Robinhood about selling order flow, which I'm surprised was even news to regular investors. It's great they eliminated fees for normal trades, and I also understand most major brokerages sell order flow as well (and still charged for trades for a long time). I read that Fidelity is the only major player that doesn't sell order flow.
Do you have some sources that someone could learn more about this, ones that don't have a vested interest in painting it in a positive way?
Also, I'm still wondering, considering dark pools [1], and the inside information that would come along with that, since those trades wouldn't hit public markets, how the stock markets can be considered a fair place to trade?
> They make a ridiculous amount of money doing so.
I suppose it depends on how you define ridiculous, but HFTs actually make a surprisingly small amount of money these days. Probably single digit billions across the entire industry (https://quant.stackexchange.com/questions/34856/how-much-pro...), though 2020 was an exceptional year for many firms.
> Shouldn't the exchanges have offered the best price, and provided liquidity, in the first place?
Either your wording is a little funny, or this question indicates great ignorance about how trading works. Exchanges do not provide liquidity, market makers do. In 2021, "HFT" ~= "market maker".
I don't know that much about this, so you could chalk it up to "great ignorance", I suppose.
I'm a software engineer, interested in crypto, and not that involved in traditional markets (except for holding an S&P 500 index fund).
I do think the exchanges in traditional finance shouldn't have required HFTs in the first place (i.e. it's an antiquated technology). I also think hedge funds and the ultra rich have privileged info, that retail investors don't have.
Anyway, I appreciate the clarification. I like learning about all this.
> I'm a software engineer, interested in crypto, and not that involved in traditional markets
As you learn more about crypto and traditional finance, it'll be fun to compare the two. Your confusion about the role of an exchange in traditional finance might be because you see the crypto world, where a single entity often performs the roles that many entities perform in traditional finance (exchange, clearing firm, broker, etc.).
> I do think the exchanges in traditional finance shouldn't have required HFTs in the first place (i.e. it's an antiquated technology)
I'm not quite sure what this means, but it's important to understand that HFTs exist in the crypto space as well. Capital markets don't function particularly well without marker makers, and absent some rule explicitly preventing high speed trading, marker makers will tend towards being the fastest traders in any market.
> As you learn more about crypto and traditional finance, it'll be fun to compare the two. Your confusion about the role of an exchange in traditional finance might be because you see the crypto world, where a single entity often performs the roles that many entities perform in traditional finance (exchange, clearing firm, broker, etc.).
Yes, I agree!
In terms of what I called antiquated technology, I think there are a lot of layers on traditional finance, and a lot has changed since its beginnings. I think crypto will go through a similar evolution, in terms of tech, regulation, etc. I think we're in the very early stages for crypto and it has a chance to be an even better system.
I do know that HFTs exist in crypto, and it still is the wild west in some ways, but in the end I like that innovation is happening and that there are alternatives to existing systems.
That said, I appreciate all the responses and I'll take some time to learn more about traditional markets.
Crypto volume is pretty hft/market maker weighted as well.
There’s just not
a. Enough random interested parties willing to buy/sell various coins so that you have low-spread and liquid markets
b. Non-hft players who keep crypto markets in line with each other
This isn’t super surprising. Managing posted liquidity is a difficult task that sort of requires being halfway to a market maker, and naturally most non-market makers just want to buy and sell right away instead of posting orders and waiting/hoping.
The result of this is that most liquidity is provided by HFTs, since they’re the only party that can and even wants to have a bunch of bids/offers out for you to trade against.
Today's crypto has the same issues: the fastest decision-making computer with the shortest time to the network makes the block.
Just like cutting inches off mainframe cables, manufacturers of ASICs purpose-build computer chips for crypto. GPU operators tune their cards and even download new code to get every last bit of processing capability from their devices. Crypto in these ways is just like HFT.
Transferring data and calculating the core of a new block takes a fraction of a second, and then it takes an average of several minutes to find the right random numbers to finish the block.
A latency advantage in HFT lets you take most of the profits. A latency advantage in cryptocurrency mining gives you a fraction of a percent better profits.
A calculations-per-second advantage helps in mining, but it's strictly proportional.
> Transferring data and calculating the core of a new block takes a fraction of a second, and then it takes an average of several minutes to find the right random numbers to finish the block.
A PoW, say Bitcoin, is configured in the consensus algorithm to avoid duplicate spending. The fastest, correct miner for a block that communicates the quickest to the network will get the block.
I think you're very confused about how mining blocks works. It only takes microseconds to test a specific hash. Every miner is testing a different random bunch of numbers to see if they get a lucky result where the hash starts with enough 0 bits.
There's near-zero overlap between the numbers tested by different miners. So a latency advantage does not make you win. Everyone is picking lottery numbers in parallel. If three miners have the exact same hash rate, and one of them has a 2 second head start, then the one with the head start is only going to win 33.4% of the time.
You're making some incorrect assumptions about what I wrote, based upon somehow reading things I didn't write. I am intimately familiar with the bitcoin network. I never said that many miners simultaneously work on the same block. Don't worry, you aren't alone in the crypto world with making assumptions.
"The fastest, correct miner for a block that communicates the quickest to the network will get the block." is misleading at best and completely false at worst.
If I'm misinterpreting you, feel free to clarify, but to me it looks like you're saying that latency matters (more than a fraction of a percent) with cryptocurrency, and it does not matter.
And moreso, "the fastest decision-making computer with the shortest time to the network makes the block." is not true. Even if you mean "lucky" by "fastest", since the computer that finds a block doesn't have to be fast, 99+% of the time blocks are found far enough apart that time to network is irrelevant.
I meant that the flat system of crypto where (at least before industrial mining), people could spin up mining rigs (which is still possible, I think at least with some altcoins), but also, that the barrier to entry for folks trading crypto is lower than traditional markets. Some may chalk this up to the need for KYC/AML, but I think there are intentional barriers to entry for individuals that people in power don't want to have access to say, equity markets, that don't exist as much in crypto markets. I don't think crypto markets should be used to supplement terrorism, money laundering, tax avoidance, or anything else like that, but if you take a look at say, Robinhood, who tried to lower some of these barriers to entry to traditional markets, I think crypto as a whole is trying to do that. I also have said in other posts, and will continue to, that blockchain analytics will only continue to get more advanced, so the narrative that crypto is only used for illegimate activity is bullshit. I do think that it is a power to the people that can't be stopped, due to its decentralized nature, and that it is the only possibility I've seen so far as an alternative to everything else going on that requires sovereign government policy and currencies (that are backed by war, control, etc).
I'd like to recommend the book "trading at the speed of light". It's an in depth look at the world of high frequency trading based on first hand interviews with traders, court documents, etc. It would appear based on what little information is actually available that HFT firms net only modest profits after taxes and fees on trades. Historically, it appears most firms fail to turn a profit and shut down. A paper of Laughlin (2014) suggests virtu, a hft firm that now executes Robinhood orders, earns an estimate profit of 0.24 cents per trade, with 0.05 to 0.1 cents per share traded being a respectable profit.
I highly recommend this book though if your into this topic
> I was going to mention HFT. How is it a level playing field when they are in the picture? Paying top dollar just to be closer and closer to the exchanges to get the fastest, "best price", when really, they have info before anyone else.
Apologies if my post implied insider knowledge on the part of HFTs. That's not the case.
The point I was making is their model is ONLY viable if they have the best mathematical brains, the best computing power, the best connectivity. If anything in that fragile chain is broken then their model is unviable.
In the end, they trade on what is best described as noise. They look for patterns in the noise. And so they need "the best" noise, as soon as instantly as they can get it, and the computing power to process it as close to instantly as possible.
I called it "another story" because its a truly nuts way of making money. ;-)
There is an old saying. "Time in a trade is better than timing a trade". HFTs are basically trying to do the latter all day, every day.
In my view, John Doe the buy & hold investor actually has the advantage that they can wait for weeks, months or years.
> Paying top dollar just to be closer and closer to the exchanges to get the fastest, "best price"
Being able to send an order with a smaller latency does not magically get you a "better price".
99.9999% of the market participants couldn't care less if their orders arrived 1ms or 1m after they send it. Hell, most hedge funds trade on a _daily_ basis, with multiple days of expected returns predictions, and are more concerned with the transaction cost than the latency, thus opting for a very slow "market close price" execution algo.
Those interested with very low latency are not hedge funds but market makers, and the kind of microstructure signals they exploit is not only orthogonal to what a retail investor would do, but often brings in just bips per trade, meaning the leverage required to make it worth it is anyway out of the retail league.
> I think it is very likely that they have info before normal retail investors have any idea.
What is a normal retail investor? Obviously hedge funds are going to be faster to react to e.g. earnings events than you. That doesn't mean this information is not public. It's just that HF pay data providers, invest in automatic data processing and decision making, etc.
But normal retail investors don't trade on events, they trade for the long term. For the simple reason that they don't want to hit refresh every second on the web page publishing earnings calls of each stock they want to buy.
> what about dark pools?
Yes, what about them? The name triggers the imagination of people but there's really nothing fancy about it. The objective of dark pools is to allow the exchange of shares without too much of a movement in the orderbook. This is actually good for both users of dark pool (they get lower slippage) and users of the public market (it prevents artificial big swings in price due to large buyouts, which would be announced anyway). The liquidity at time T in the order book is not tailored to absorb any ridiculous amount that a large investor could be willing to exchange.
> Shouldn't the exchanges have offered the best price, and provided liquidity, in the first place?
What does that even mean? The exchanges don't offer price by themselves, they just reflect what participants are willing to pay or receive. They are just middlemen facilitating the exchange of goods by publishing the order book of who's willing to buy/sell and at which price.
The exchanges also cannot magically provide liquidity out of thin air. Liquidity means there is someone real on the other end of your trade that is willing to buy or sell to you. Exchanges cannot create that artificially.
What exchanges do, though, is offer rebates to providers of liquidity (including the market makers that you seem to despise) in exchange for the liquidity they provide. This is not a random decision by the exchange, it's because providing liquidity to the market is beneficial for everyone. As an investor, it means I won't have to worry that I will not be able to sell my shares whenever I want to. It also means that the spread will be tighter, thus lowering my slippage. And subsequently, it also means arbitrage is most likely in place, so I'm not being scammed just because I didn't check the price on 5 different platforms.
> Those interested with very low latency are not hedge funds but market makers, and the kind of microstructure signals they exploit is not only orthogonal to what a retail investor would do, but often brings in just bips per trade, meaning the leverage required to make it worth it is anyway out of the retail league.
Thanks for clarifying.
> What is a normal retail investor? Obviously hedge funds are going to be faster to react to e.g. earnings events than you. That doesn't mean this information is not public. It's just that HF pay data providers, invest in automatic data processing and decision making, etc.
Well, this is sort of what I'm saying. As a regular person, you just don't have the same information, or the ability to act on it as quickly. Sure, buy and hold investors aren't really affected, but they are providing liquidity for these folks who can take some advantage. I may be pretty wrong about this, however, it's just like anything where there are friends / contacts / associates. Some parties just have more information, especially if they have money to spend. You did mention earnings though. I just have a hard time believing that hedge funds only act on public information. They might structure their trades based on how not to get flagged, but how do they not have friends or contacts in the space that tell them a thing or two? This is what they are doing full time, so I would imagine they spend a good majority of their time thinking about how to make the most money and not raise any red flags. I actually don't have an issue with this, but I always see claims that the traditional market is totally fair, but it does not seem like a very flat system to me. Those in power seem to have some advantage. If that was how the market was presented (i.e. some people have sway, more information, and the ability to act more quickly than retail), I wouldn't have any issue with this. I see the opposite though, the narrative is that retail traders can make trades without worrying because it's totally equal. If all retail traders were doing was buy and hold, then again, no issue, but not all retail traders trade that way.
> Yes, what about them? The name triggers the imagination of people but there's really nothing fancy about it. The objective of dark pools is to allow the exchange of shares without too much of a movement in the orderbook. This is actually good for both users of dark pool (they get lower slippage) and users of the public market (it prevents artificial big swings in price due to large buyouts, which would be announced anyway). The liquidity at time T in the order book is not tailored to absorb any ridiculous amount that a large investor could be willing to exchange.
Where do I learn more about dark pools? My initial response to learning about them was that they are basically tailored to hide trades from the general public, for the benefit of institutional traders. I was concerned that dark pool operators would also have information that then they could front-run the rest of the market with. I feel like when I make a trade in the equity markets, or if I read something in traditional news, someone else has heard about this earlier that day, or maybe days before, based on insider information, just due to them being more deeply involved with the market. I just don't really see how this is fair (and this is the claim I see time and time again in traditional markets). I don't think all this information is public. If it's in some obscure place, that 95% of the investing public doesn't see, is it really public? Maybe the SEC protects against that, but it seems like the big players have an advantage. It seems like I have a lot of incorrect assumptions though, so I'd like to learn more about this.
> What exchanges do, though, is offer rebates to providers of liquidity (including the market makers that you seem to despise) in exchange for the liquidity they provide. This is not a random decision by the exchange, it's because providing liquidity to the market is beneficial for everyone. As an investor, it means I won't have to worry that I will not be able to sell my shares whenever I want to. It also means that the spread will be tighter, thus lowering my slippage. And subsequently, it also means arbitrage is most likely in place, so I'm not being scammed just because I didn't check the price on 5 different platforms.
Yeah, I get it, this is a quite mature market (and that's a good thing). I still have a feeling that the extremely powerful have sway in the market, in a way that isn't exactly "fair", but maybe it just comes down to the amount of capital they have (but again, I would think that the size of the trades should be on public markets then, not dark pools). Anyway, in the end, what I've learned from all this is how far the traditional markets have come, and how other markets (like crypto, which also have things like dark pools) can learn from this.
> Well, this is sort of what I'm saying. As a regular person, you just don't have the same information, or the ability to act on it as quickly.
Well the general idea is that everyone have the possibility of getting the information at the same time. The difference is how fast you can react, which seems fair to me.
To be frank, hedge funds, especially quantitative ones, are usually not the fastest to respond to earnings. The lifecycle of earnings announcements often roughly goes like that:
- Company X releases its earnings on the SEC website. This usually happens once the market is closed (~6pm) so that people have until the next morning to digest it, and avoid dubious ultra fast reactions. The publication date was already announced so everyone know it's coming.
- The next morning at market open, some (few) investors already place trades based on the earnings published. Most of the time, these are human decisions made by financial analysts experts on company X that read the earnings, because systematic funds seldomly trade on unstructured data such as PDF reports.
- an earnings calls takes place the next morning also, so that financial analysts can ask questions and clarifications about the figures to company X. Right after, the wav/mp3 of the call is uploaded (often on the company website). Some more investor do trade based on the earnings call, either by financial analysts listening to it, but more and more just by reading the transcripts. Some (few) hedge funds apply NLP to parse the transcripts at that point, and trade based on the results.
- The next day, major data providers (think Reuters/Refinitiv, Bloomberg, etc) have processed the transcripts to structured data. The major hedge funds all subscribe to these data providers, and are now able to start trading on the earnings event.
- The same day, Bloomberg releases an article about the earnings of company X and explains why its good, dedicated retail investors and non systematic hedge funds get interested and join the trade.
- for the next 10 days or so, more and more (slower) people will continue the trend on these earnings, until the price stabilizes to a market consensus. See PEAD - post earnings announcement drift - for more information.
This is more or less how it goes for earnings. Nothing strikes me as _unfair_ here. Everyone had the opportunity to put effort in reading the earnings. It's just a trade-off of convenience (i.e. I want structured data), price (i.e. I hire a financial analyst to interpret the earnings early), and R&D (i.e. I invested in NLP to parse transcripts) versus the speed of reaction to the event.
What could make it more fair for retail investors? Forbidding the use of financial analysts because they are more knowledgable than average Joe? Forbidding the use of NLP because average Joe does not know how to code?
> I just have a hard time believing that hedge funds only act on public information.
Oh but trust me they do. Now there will always be outliers, shaddy deals, etc. Any system with rules have cheaters. But that's definitely very very exceptional. This is especially true for non proprietary funds (funds managing money of other people - the vast majority), since the amount of scrutiny is huge.
Allow me to use myself as an example. I work in a hedge fund, though I deal mainly with operational / technical / quantitative matters. I have one of the lowest grade of surveillance level (MIC) which still entails:
- All my work phones are tapped (mobile and fix)
- All my work conversations are logged.
- I am forbidden from contacting anyone about professional or financial matters if the medium is not logged (i.e. No whatsapp, no signal,...)
- I am forbidden to invest in most asset classes. Except for equities, for which I need pre-approval of the trades 2 days in advance, and have a minimum holding period of 30 days. Compliance has access to my brokerage account, and reports on those of my close relatives.
- I am forbidden from giving any financial advice to anyone, even family or friends
- I am forbidden from receiving any financial research or counseling material from anyone, through any medium (mail, phone, conference) if the material is 1) free or 2) undeclared.
- I am forbidden from discussing or meeting with some people in the office, as well as walk in certain parts of it ("Chinese walls") , since screens could reveal information, or conversations could take place.
- At leat 15h of compliance / legal training per year.
- I am personally (not the company: myself) liable up to $10 millions (disclaimer: I don't have that kind of money) if any material incident happens that could be traced by me not setting up the proper mitigation. E. G. If a bug happens and I did not give the team the means to have catched it. Or the worst nightmare of MICs: if someone does some shaddy business, and I did not arrange for enough control or compliance training for him to know that it's illegal.
- The usual set of no paid gifts, trips, conference in fancy hotels or whatsnot.
- etc etc etc
Keep in mind that's not even the highest scrutiny level. So, yes, some people cheat, we see it in newspapers, but that's the 0.0001%
> Where do I learn more about dark pools?
I honestly don't know. This is really a detail of equity markets, each broker have a different one with different specificities. As for front running, this is IMHO something of the past (at least on equities, for major brokers). Clients are well aware of the risk and require huge amounts of compliance and processes on their brokers to prevent that, not even mentioning the regulators themselves. The reputation risk is just not worth it.
> My initial response to learning about them was that they are basically tailored to hide trades from the general public
Well that's true. But it's often because the purchase is too huge to be made public, it would disrupt the market for no reason. Think of what happens to crypto when a whale sells off, huge upswing followed by huge downswing, until the price settles back again,and in the meantime the investor got an awful slippage, people panicked, bit trade crazy stuff, etc.
I know dark pools trigger the imagination of journalists and retail, but there's really nothing fancy about them. Let's take a real world example to explain how they are used.
Every year, Apple reserves a portion of their profits to buy back some shares from the market, which they then destroy (I won't enter into the details of why they do that, it's a pretty common practice for growth companies). Apple does this every quarter, it amounts in 2021 to $20 billions of share buyback per quarter (~$80 billions last year). What would happen if Apple just goes on the market and places a fat $20 billion market order? It would be total chaos. With such a big order, the whole liquidity of the book would disappear, price would skyrocket, people shorting apple would receive insane margin calls, people long apple would be instant billionaires for a split second, volatility would cramp up and market dislocation would trigger, meaning the stock would have to be halted, trading bots would sell everything, Apple itself would be ruined to buy at such a large price, etc, etc, etc.
That's where the dark pool can be handy. Apple announces publicly the buyback amount and date (this is mandatory for public companies), and in exchange for a (often) slightly less good price, apple can perform its buyback on a dark pool where the price won't move, and nobody will panic.
Look at companies where stocks dip or rise a few days to the day before earnings are announced. How does this happen if they don’t know something the general public or most other investment firms don’t know?
Agreed that the people getting caught are dumb. Especially making trades about your ex employer when you’ve already started an insider trading ring.
I think it's easy to assume government agencies have weak / outdated tech, but the SEC is notoriously pretty advanced in how they identify bad actors. Think about situations where someone is passing information to a friend who does not work at a company and gets a cash kickback. Somewhere they're getting a graph of relationships, and then merging that with transactions + likely some detail around known public disclosures, and doing this all at a scale of hundreds of millions of people and billions[?] in daily trades.
Your solution is easily sidestepped by trading through an entity that can’t be automatically traced to you. I’m pretty sure it’s more complicated than that and involves some form of anomaly analysis involving high gains on low activity accounts at suss timing
Entity trading is not going to obfuscate things that much. If you trade as an entity you probably have to provide an obscene amount of information to your trading platform like who are the stakeholders of the entity and who are the traders.
Not saying that SEC doesn't have sophisticated tools but I think in most cases they don't need that. Their power lies in their regulatory ability to collect personal information of who trades, when and how much.
I think the idea is to use an entity that you don't have any sort of formal agreement or paperwork with. Eg. work out a verbal agreement with an old friend that you trust, send them the insider info in an encrypted or analog way, then they send you a cut through some unrelated method. That all seems plausible for a normal motivated person to execute on and very hard to prove.
I think the idea is more like "get my acquaintance Bob to go to his broker and make the trades based on my information, Bob and I split the profits under the table."
The SEC can collect all the information it wants, but people committing securities fraud may not provide accurate information.
There are quite a few foreign hedge funds that hire hackers to breach companies and steal data.
Trades are back-fitted into some model for plausible deniability, and they also purchase political and legal cover, often at the highest levels. I wouldn't surprised some are just a front for an APT that needs more cash for their black budgets.
They generate a lot of asymmetry, billions upon billions.
It's much more sophisticated than just (a) do you or did you work there and (b) did you make money on a trade.
I work at a law firm that does public M&A deals and we occasionally get inquiries from the SEC about, e.g., people that went to my high school (but a different class year) who bought stock in a company my firm did work for in the months leading up to the deal. Obviously neither me or the other person ever worked at either company (or even had any connection to them), but they still identify us as a potential risk because I could have potentially obtained insider info through the firm and then passed it on.
So how would we expect people who want to evade that system to react?
A simple proposal they would quickly grasp is to have insider trading but spread out over two or more companies, let's call them ACME and Weyland-Yutani. They would have the Weyland-Yutani employees make profit off insider info passed from ACME employees, and have ACME employees make profits off insider info passed from employees of Weyland-Yutani. I imagine they would also want to prevent the groups involved from becoming too large.
Your scheme only captures the biggest idiots. There are plenty of ways that require much more sophisticated methods to detect. An example is insider reciprocity: an insider at company A trades inside information with an insider at company B. They both profit from the insider information but neither trades in the instrument for which they could easily be flagged as an insider.
There are insider trading rings on tor. If you work at any billion plus dollar publicly traded company, you post insider information you have in exchange for insider information from others. That way the stock bets you make aren't tied to your place of employment. I've got no idea how legit any of it is, though. My company isn't publicly traded.
What if I tell someone unrelated to me to make the trade. Insider trading can work and has worked in the past, you just never hear about the guys who don't get caught cause they don't just do it as stupidly as you are assuming
"They think that they can leverage some assymetry of information when in reality there's no such thing. If you trade the stock of your current or former employer"
"That's the thing about insider trading. People who do it are just complete idiots."
Maybe in this pumped up bull market certain individuals have restrained from Insider Trading, but it's alive and well.
In college, I was a errand boy at a finance business in SF. The amount of insider tips I heard was staggering. I would be a rich man today if I had a bit of money back then. (The owner of the business did get close to going to jail, but it was over something else. I believe it was tax evasion. It didn't help he was Ed Meese's Financial Planner at the time.
I live in Marin County. A wealthy enclave that espouses liberal values, but are ruthless when it comes to their money. They share info at Wholefoods, or the charity dinner they get tipsy at. Hell, if I had money, I'd be tempted.
They trade a lot of information.
For years, the SEC was very small, and it's not much bigger today.
Hell, the only real money my dad made in the 90's was from an insider tip over thanksgiving dinner from a father in-law. (My dad passed, and the SOL is long gone.)
The people doing it do not trade themselves. And the SEC does not have a list of all current and former employees of the company (only certain officers have to actually report with the SEC). People who do this are not idiots...most of them do not get caught (selection bias, you only see the people who got caught, there are individuals who have made $100m, $200m doing this...never been caught or charged).
Also, the way they do this is by examining trading patterns. The SEC is 100x better at this than most other countries. Insider trading prosecutions are very rare outside the US (not just because it is hard to catch, it is very hard to win insider trading cases at trial). It requires a fairly sophisticated approach to uncover suspicious trades (every day, billions of trades, millions of securities, you have no idea who works where, you have no idea who their family is, you have no idea who their friends are...not easy).
I don’t get why they would do it in the first place. It’s merely $3M over three years for at least four people. Substantial amount, sure, but compared with the risk and their income from Netflix salary and generous options, I just don’t see where the incentive was.
First, I'm sure they thought the probability of being caught, and thus the risk to themselves, was low. And who knows? They may have even been right about this -- without knowing how many people get away with insider trading, it's impossible to say.
Second, nearly all of the profits were allegedly made by Joon Jun and Junwoo Chon, who did not work at Netflix. $3M over 3 years was probably a lot of money for them, as it would be for most people.
Low-mid value insider trading, tax fraud and other similar white-collar crimes are a terrible idea. They are ridiculously easy to detect, and the authorities will go after you because $3M is enough of a haul to set an example and further some careers, but not enough to give you the means to hire fancy lawyers to defend yourself.
I know an SEC lawyer. He admits that the SEC doesn't have the resources to go after the really big fish because they can afford to fight like hell in court, while the smaller fish are much easier to convict. So they have to pick their battles. Doesn't mean that they never go after the big ones but they'd have to have an overwhelming case, which is tough.
Insider trading regulations are intended precisely to punish small-time defectors from ongoing executive-suite conspiracies against the investing public. Prosecutors know very well that charging CxOs who trade their own firms on inside information would quickly result in Congress radically changing the relevant laws.
There really does need to be Congressional leadership here
US insider trading laws confuse the courts, waste all the appeals courts times, and unnecessarily burden everyone
The securities regulator just dangles a Sword of Damocles over everyone’s head without having a single “Insider Trading Act” to rely upon, just their own opinion leveraging their blanket fraud statute, curbstomped by the courts until its cranium is molded into narrowly tailored brain matter, with exceptions oozing out the ears into gutter
What's the penalty for this? If the total profits were 3M over several years and at least 3 Netflix engineers were involved (who combined would have made that much anyway over that period), it seems awfully risky unless the penalty is trivial.
I’m surprised that access to subscriber numbers was enough signal to generate alpha. Just off the top of my head, I can think of multiple public or semi-public data sources that you could use as a rough proxy for Netflix subscription numbers. Think DNS logs, VPN providers, peering data, credit card transactions... and that’s without reverse engineering the app at all. I’m sure if you really dig into it you can find a few methods for estimating subscriber count. You don’t even need a count, just a well-distributed sample of delta. If Wall St estimates subscriber growth of 1%, but your model shows 5%, who cares what the exact numbers are?
Or perhaps it’s easier than I thought, since I assumed surely those sources would be fully mined, such that insider knowledge of subscriber numbers wouldn’t be enough to reliably know which way the stock will move after an earnings announcement.
NFL player Mychal Kendricks traded on insider information provided by a friend working at Goldman Sachs to make just over a million dollars. Kendricks got off fairly light and even kept his job but it’s nuts that two people in two highly-coveted and well-compensated positions would risk so much for such a (relatively) small amount. Money makes people do stupid stuff, I guess.
A Chicago pharmacist just got charged for selling CDC vaccination cards for $10 each for total $1250 in profit. Lost his $100k+ job and faces at least a few years in prison. Crazy what some people will risk for a little money.
My wife has been in finance in public companies since we met. Now she's a C-suite at a public company. I avoid not only trading the company stock but the entire sector. I usually just trade SPY or other ETFs in order to completely avoid any chance of looking bad. It's just not worth it given how much my wife makes.
"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."
Fascinating tool!
I remember a video we had to watch at my previous employer, explaining what insider trading is and discouraging it. Part of it had a testimony from a real guy from that company, who was caught on insider trading, was convicted with a jail time, and was very remorseful on the video, explaining how he ended up going that slippery path, and how awful the consequences are. Maybe he even got some time reduced by doing that video, don't know.
important to keep in mind: if you work for a publicly traded company and share mnpi without even realizing it and someone trades on it (or perhaps something else) without even telling you, you could still face criminal liability.
It's legally debatable but in practice the feds can screw anyone if they want to. The laws related to insider trading are broad enough (because they kind of need to be to do the job) and enough people want it to be true that the commenter can soak up easy virtue points.
it seems pretty simple to me: if you believe that you've learned something through your job that you wouldn't know otherwise, that may have a material effect on the movement of your job's stock price, and you tell someone about it and they trade on it, you've opened up an exposure for yourself.
There will be additional criminal + civil penalties decided in court. As far as I can tell, the $72K fine is imposed directly by the SEC for breaking the rule.
And this has nothing to do with her being a Representative or her husband making the trades.
Its not illegal to just know non-public information. Insider trading requires a lot of things such as trading and having a contractual obligation with the company not to say anything (employees, board, executive) or trading and getting the information from someone with the aforementioned duty. Just knowing what a federal agency is going to do isn't one of them.
Many of these trades aren't really inside information, like buying stock in the vaccine companies shortly before government deals to bulk-purchase vaccines. Any careful observer would know the rough timing of those deals.
Just the same, Congresspeople should be restricted from dealing in individual stocks and making trades that are going to look expensive. They have to put their money somewhere, but they could be restricted to index funds.
Or they could have trading windows, like corporate execs do, limiting their ability to profit on insider knowledge.
Taking the other side of this argument for a second..
Doesn't insider trading just move expected profits from the wide and distributed network of people betting on information gathered through personal networks, and towards the concentrated group who can code the fastest trading algorithms?
I would like someone to suggest reasons why we should favour the coders over the people with friends.
I guess a more fundamental difference (in defence of insider trading regulations) could be an insider trade may be able to be put on in larger size, whilst market movements around news events may move the market with lower volumes.
Insider trading is about theft of intellectual property not fairness: i.e these individuals were stealing from Netflix. It's just that corporate lobbyists have convinced the government to take up the fight for then.
huh. insider trading is about information asymmetry. material nonpublic information harms those who take the other side of tipped trades and therefore harms everyone in the market.
intellectual property is about actual things and how they're made, and unlike mnpi it has intrinsic value outside of speculating on securities prices.
tradable material nonpublic information isn't useful as most intellectual property is, but intellectual property, or knowledge of its development, can be tradable material nonpublic information.
netflix isn't harmed when their employees leak business performance numbers and their associates trade on them, the people who took the other side of those trades are the ones who are harmed. if it happens a lot, the whole market is harmed, if it happens a lot in one company, then that one company is harmed.
I've heard this argument before and I'm not sure I buy it.
Isn't 'efficient price discovery' the primary selling point of markets? Does the artificial suppression of information until "everyone" (but in practice mostly just HFTs these days) has equal chance to react to it meaningfully hurt retail investors, or is it mostly just taking profits from other people trying to game earnings announcements for profit?
Part of my point is that people's ability to make an algorithm to react quickly is unequal, even if the opportunity to do so is equalised under insider trading regs. The profit will flow towards those with the ability, which the regulations favour.
There would be less volatility around earnings announcements, because the market would have already reacted to that information. i.e. markets would become accurate more quickly
right, but all those reacting would be insiders. wouldn't that mean that my 401k, or my college endowment, or my favorite foundation's endowment would be left holding the bag? why would any institutions invest in such a system?
Hmmm. I wonder to what extent institutional investors are able to get out early when there is an earnings miss. I guess I assume they usually get front run by day traders anyways, but not sure how/where to find data to answer that question.
moreover, if insiders within a listed company were able to trade that company's stock freely, wouldn't it be more consistently profitable for them to intentionally generate surprise volatility in their company's stock price, and then trade against the market with the alpha that they've engineered for themselves? how many other schemes that ultimately defraud investors could be cooked up?
imagine a company that reported realtime profit and loss through the magic of computers in a world with no insider trading regs. the sales team (or whatever team has the biggest ability to impact realtime pnl) would be making and cancelling deals just so they could trade on them.
quarterly earnings and embargoes around them are kind of the last bastion of the idea of ensuring long term incentives, if anything we need more long term incentives, not less.
