from Hacker News

Insider trading has been rife on Wall Street, academics conclude

by Bitcoin_McPonzi on 2/11/18, 4:29 PM with 417 comments

by geoffc on 2/11/18, 6:04 PM
For the last 30 years I have bought stock in tech products I use and like and hold it until I no longer like the product. This simple strategy has dramatically outperformed the indexes. In hindsight the last 30 years have been great for tech so maybe I just got lucky on my industry selection.
by PricelessValue on 2/11/18, 10:05 PM
Why do we need academics to tell us? Go ask wall street. Go work on wall street. It's not a secret. There is a reason why the most valuable commodity on wall street is information.
We know insider trading happens. Just like we know price collusion ( libor rates or lysine price fixing ) happens.
If banks are colluding on something as fundamentally important as libor rates, then everything and anything is happening.
by tankenmate on 2/11/18, 6:56 PM
And the people who can consistently do insider trading are also the people who can use parallel construction to justify their trading decisions. For every possible trade there are advisers out there for both sides of the trade, if you already know which side is going to win all you have to do is listen to your own choice of advisers beforehand. "Yes your Honour, I talked to Fred from Conveniently Biased Advisers LLC three days before the event. He assured me that this trade would benefit me, so I made the trade."
by anigbrowl on 2/12/18, 4:08 AM
I'm perplexed that virtually all the comments are accepting of this state of affairs and focused on retail investment strategies, and so little given to the implications of how the public will respond to this information..
by brownbat on 2/12/18, 8:31 AM
Before getting outraged I try to apply the Matt Levine test: insider trading is about theft, not fairness.
The first study talks about investments during TARP. The premise of TARP was that credit markets were seized by irrational fears, and government investments could reestablish normalcy.
It doesn't say what strategy those with government connections used, but...
I wonder if we should be angry at people who defied the trend and were rational even before the government did anything. Maybe we want things like TARP to work, but not too well or too early. Certainly not with the help of anyone willing to accept the risk that the policy process might swerve at the last minute.
The article then begrudgingly admits a benign explanation for the second study. Brokers looking for buyers or sellers naturally leak information. It turns out it's hard to try to sell something when you never ask anyone if they are willing to buy it. On the other end of the line, people who suddenly get offers to buy or sell a thing might change their mind about its value.
That's not so much insider trading as it is how all markets work.
Here's some more, from a far better writer than me: https://www.bloomberg.com/view/articles/2015-04-01/another-p...
https://www.bloomberg.com/view/articles/2018-01-03/bill-ackm...
He also writes about Bitcoin if you're into that.
by RcouF1uZ4gsC on 2/11/18, 5:01 PM
Being a retail customer on Wall Street is a fool's game. The large finds have access to legal data and insights that you don't have. Just invest in an index fund or large mutual fund.
by montrose on 2/11/18, 11:26 AM
I love the technique of catching misdeeds via subtle statistical traces that the bad guys leave. It is extremely hard not to leave a statistical signature when you do something bad repeatedly. You leave tracks you have no idea you're leaving. And since it does seem likely that there's a lot of de facto insider trading, I expect there will be more studies of the type described in this article.
by hendzen on 2/11/18, 5:23 PM
"They find evidence that large investors tend to trade more in periods ahead of important announcements, say, which is hard to explain unless they have access to unusually good information."
Typically for regular macro-level financial announcements like GDP growth, employment numbers/non-farm payrolls, rates announcements, etc, the announcements happen on well-defined, publicly known intervals. Similarly for company specific things like earnings announcements. It is expected that there will be lots of (non-insider) trading before these announcements - active investors may just want to reduce risk before a large move in an unknown direction. Of course, I don't doubt that there is a large amount of insider trading, but its worth considering other causes of an observed phenomenon rather than just jumping to conclusions.
by jnordwick on 2/11/18, 5:39 PM
The only show correlation under an overly simplified model and show odd signs of data massage or p-hacking.
For example the TARP paper shows that those with government connections performed better, but only after 9 months, and we dont know if that was a blip that then reverts back. I've only scanned the paper.
Why after 9 months? The usual mechanism of front running the info you would expect the largest difference to be immediate and normalize from there. That is a warning sign for me that these papers aren't very rigorous or their model is too simplistic.
The other paper talks of information leakage on large order flow, but that is supposed to happen. When a broker has to transact a large order and he shops it, it would be silly to not expect leakage. The counterparty he goes to now knows about a big order and it will change his perception of things regardless of how many laws you make.
With the era of even better algos to sniff out intent, some of this leakage could be from just better data mining tools.
Do people expect 100% hidden info to all of the sudden go live and tank a price when a huge trade is printed? Leakage is often wanted to give the market time to adjust.
by twoodfin on 2/11/18, 5:10 PM
The description of the second paper’s conclusions don’t seem particularly damning. Large active investors have a huge incentive to acquire relevant information prior to big announcements. That’s why they have expensive research departments.
by Pokepokalypse on 2/11/18, 5:13 PM
Wait until someone figures out how to prove that by playing chicken with a budget resolution, several key congressmen have learned how to game the VIX.
by overcast on 2/11/18, 7:21 PM
Step 0: Forget trading on the stock market. You will lose.
Step 1: Pay off your high interest debts. School loans, credit cards.
Step 2a: If your company matches a 401k, take advantage of free money. Max out their contribution.
Step 2b: Go to vanguard.com, open a Roth IRA, choose a Vanguard Retirement that matches your retirement date, dump $5500/year in until you're 50, then $6500 after that.
Step 3: After emergency money is handled, take excess invest in the following index funds at Vanguard. Admiral shares require minimum $10,000 in each. However you can start with the standard share version, and then move them to admiral once your balance reaches $10k.
56% Total Stock Market Index Admiral Shares – VTSAX
24% Total International Stock Index Admiral Shares - VTIAX
20% Total Bond Market Index Admiral Shares – VBTLX
Enjoy your millionaire retirement status.
by lettergram on 2/12/18, 12:25 AM
My startup is actually targeting tracking "insiders", currently the working project name is a bit different:
https://projectpiglet.com/
Although I have parked the "insideropinion.com" domain: http://insideropinion.com/
It turns out, that although there are a lot of insiders trading, people on the internet love to talk about their companies. Recall the last time you saw, "I work at Google?" on Hacker News?
That being said, I use it to trade regulrarly and similarly make money. Although I would reocmmend diversification as the top comment here currently says.
by fallingfrog on 2/11/18, 5:31 PM
What really irritates me is that for a whole generation of people, there is really no other way to prepare for retirement than to throw your money into the stock market via a 401k. And it's a rigged game. If you try to move your 401k from stocks to bonds it will take 2 full trading days; in that time the market can drop 30%. The exit doors are narrow and you're not first in line. Especially if you've put money in at the top of the market- expect to get screwed.
by Dowwie on 2/11/18, 7:41 PM
links to the two studies cited in this article:
The Relevance of Broker Networks for Information Diffusion in the Stock Market https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2860118
Brokers and Order Flow Leakage: Evidence from Fire Sales https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2991617
by gesman on 2/11/18, 6:05 PM
>> well-connected insiders profited even from the financial crisis.
THAT's when the biggest money are made.
by Havoc on 2/11/18, 8:10 PM
You need a study for that? They're literally making TV series out of insider trading (Billions).
Everyone knows it's rigged, but that doesn't mean you can't make money.
by jwcacces on 2/11/18, 5:42 PM
I'm shocked... shocked to find that insider trading is going on in here
by kingkawn on 2/11/18, 8:40 PM
I am stunned that absolutely anyone has ever thought that it was otherwise
by jacknews on 2/17/18, 8:16 AM
Nice to see proof of what everyone already knows.
by adultSwim on 2/12/18, 4:33 PM
No shit. There are party lines you can call that connect up company insiders with traders.
So much money is on the line. There's a huge incentive to buy information.
by bjelkeman-again on 2/11/18, 5:13 PM
> Changing the law to fix that may not even be feasible
That seems a very weak conclusion. I actually expect more from the Economist.
by m3kw9 on 2/11/18, 5:25 PM
Some ceo giving you secret handshake before an unannounced event is very simple to do
by paulie_a on 2/11/18, 5:44 PM
I for one am shocked... I am glad this is getting more thoroughly documented though
by tomcam on 2/11/18, 6:48 PM
They should study Congress, where it is not illegal
by zerostar07 on 2/11/18, 5:44 PM
That is good for bitcoin
by otakucode on 2/11/18, 6:36 PM
When white collar crime is normalized and only lightly punished when very rarely caught... why would anyone expect anything different? White collar crime causes far more economic damage and kills far more people every year than street crime does and this has been true for decades. But because society focuses on street crime and gives the upper class the benefit of the doubt and punishes them very lightly, white collar crime is normalized. It is very difficult to change a situation like this because taking a behavior which is viewed as normal in a social group and changing it do that it is viewed as deviance is not something we know how to reliably do.
This is a serious problem with no real clear solutions. We know that deterrence does not work, at least not in terms of making larger punishments and assuming that will reflect in fewer people committing the act. Certainty of getting caught is usually effective, but the monitoring of these sorts of markets would need to be done by exactly the people most likely to collude with violators. Until a person busted for insider trading or cutting corners on safety regulations or releasing products are earnestly made to feel ashamed and shunned by their intimate social group, I don't see much hope for change.