But earlier studies only examined a narrow selection of news announcements. Sinha decided to expand his sample by taking advantage of the Thomson Reuters Sentiment NewsScope database, one of a number of computational-linguistics products that classify articles according to their tone, novelty and relevance to a particular company.
Keeping One Step Ahead of the News
The researchers then mapped the Reuters news stories to high-frequency trading data on the 30 companies in the Dow Industrials from to , obtained from the five largest options exchanges and the central Options Price Reporting Authority actually, just 29 of the Dow stocks, because Philip Morris' transformation into Altria rendered those entities not comparable. The researchers expected traders to anticipate certain kinds of news, such as scheduled announcements of earnings.
They expected that trading volume in stocks and options might rise ahead of such events, but figured they would find less trading in advance of news stories that ought to be surprises: mergers, changes in an analyst's rating or earnings forecast, judicial outcomes, credit-rating changes and the breaking news items that Reuters calls "Alerts. That turned out to be true for stocks, but not for options. Measuring from minutes before the news stories appeared on Reuters terminals, they found that the rise in options volume ahead of scheduled news wasn't statistically different from the rise ahead of a news surprise.
The pair of charts on this page show the trading volumes before and after news for the 29 Dow-component stocks and options, measured in multiples of the volume level at the start of the measurement window and using logarithms, so that stocks and options can fit on the same chart.
News boosts stock trading volumes several-fold, but options volume jumps tofold. Composite graphs of stock gray lines and option black volumes show eerie rises -- even ahead of surprise news -- in seven years of trading in the Dow Industrial stocks. To better model actual trader behavior, researchers used computer simulations to estimate the Dow stocks' response to news events.
Sinha's working paper politely calls such trading "informed," rather than "insider trading," since some traders may legitimately know enough about a company to anticipate news. But given that options expire on a particular date, says Sinha, "if you're trading options, you must have time-sensitive information.
Insider-trading cases in Dow component stocks aren't unheard of -- but they typically involve the stock, not options. But Sinha and Dong seem to have found new cause for suspicion. Sinha's discovery of the February activity in Baxter options, which postdated their study's time frame, came by accident as he was looking for examples of earnings disappointments for one of his UIC finance lessons. In addition to the suspicious options trading before Countrywide's takeover by Bank of America, the researchers' seven-year survey found curious options activity before rating changes on other Dow components.
The conventional wisdom holds that guilty traders would favor the liquid market for stocks. But Sinha thinks that "informed" traders use options because it's easier to hide among all the strike prices and markets. Put options also furnish a quick way to make a bearish bet, compared to the borrowing chores involved in a stock's short sale. And options market makers tend to ask fewer questions, says Sinha, than would an investor who got skinned taking the other side of an informed investor's stock trade. As with any kind of corruption, insider-trading prosecutions probably catch just a small portion of the activity.
Definition of 'Insider Trading'
The trading in thousands of securities on dozens of markets generates an overwhelming amount of data to analyze. In other words, lot size basically refers to the total quantity of a product ordered for manufacturing. A simple example of lot size. Choose your reason below and click on the Report button. This will alert our moderators to take action.
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Thus, the stock will decline. Selling a stock short makes a profit when the stock price goes down.
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When the reports are finally made public, the stock will plummet. Then the executive and his friends and family all make a lot of money. Technically, an insider is anyone who has access to material nonpublic information regarding a company. Insiders may also include lawyers, brokers, investment bankers , and printers of financial documents.
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It is illegal for insiders to buy or sell a stock based on material nonpublic information. The information is nonpublic if not yet disclosed to the investing public.