Insider trade on Splunk acquisition?(twitter.com)
twitter.com
Insider trade on Splunk acquisition?
https://twitter.com/unusual_whales/status/1704870849831125446
370 comments
Can someone explain the mechanics of this specific trade to a noob? The trader bought 550k options yesterday for SPLK to hit $127/share? Since that seemed highly unlikely they were only priced at $.04 each. but now that SPLK is at $145/share they are worth $18 each? so that would be a profit of ~$10m?
Yes. The one bit you’re missing is that a call option is the right to buy a stock at a certain price typically on or before a certain date.
To make the numbers simple, imagine a stock trades at $10/share. If someone came to you and said: how much would you be willing to pay to have an option to buy the stock for $100/share? The correct answer is: it depends. If it’s the right to buy the stock for $100/share at any point over the next 10 years then that’s worth more than to buy the stock at $100/share in the next day. A stock trading at $10 is unlikely to jump to $100 in a day so the option to by it for $100 is not worth much. It could happen, so it’s worth something. But it’s unlikely. So, again to make the numbers simple, let’s say it’s worth $0.01/option to buy a stock at $100 in the next day when it’s trading at $10 today.
Now imagine it’s the next day and the company with the $10 stock discovers the cure for cancer or invents time travel or perfects cold fusion. News breaks and now it’s trading at $1,000 per share. Now how much is the right to buy the stock at $100 per share worth? The answer is going to be something really close to, but maybe a small discount from, $1,000 (current value of the stock) - $100 (how much you pay based on the option) = $900. So what was worth $0.01 yesterday is worth $900 today.
Let’s say you have $10,000 to invest. If you know in advance the news is going to break you can do two things to (probably illegally) try and profit from it.
1. Buy 1,000 shares of the stock for $10/share. 2. Buy 1,000,000 options to buy the stock for $100/share tomorrow with each option costing $0.01.
With strategy 1 you spend $10,000 to buy something that, after the news breaks, is worth $1,000,000. Not bad. But with strategy 2 you spend $10,000 to buy something that’s worth $900,000,000 after the news breaks.
In both cases you’re likely to at least be investigated. And strategy 2 seems especially suspicious because the risk is so high and the non-illegal reasons for doing it are so few and far between. Very few reasons you’d buy a bunch of call options that only pay off if something causes a stock to move dramatically in 24 hours.
Finally, while short-dated, out-of-the-money call options are not something many if anyone should be playing with, they’re just a different flavor of something very familiar. To put it in context a lot of HN readers will understand more intuitively: a call option is what you often receive when you get equity in a startup. It’s the right to purchase shares at a price (strike price) before a certain amount of time (typically 10 years).
To make the numbers simple, imagine a stock trades at $10/share. If someone came to you and said: how much would you be willing to pay to have an option to buy the stock for $100/share? The correct answer is: it depends. If it’s the right to buy the stock for $100/share at any point over the next 10 years then that’s worth more than to buy the stock at $100/share in the next day. A stock trading at $10 is unlikely to jump to $100 in a day so the option to by it for $100 is not worth much. It could happen, so it’s worth something. But it’s unlikely. So, again to make the numbers simple, let’s say it’s worth $0.01/option to buy a stock at $100 in the next day when it’s trading at $10 today.
Now imagine it’s the next day and the company with the $10 stock discovers the cure for cancer or invents time travel or perfects cold fusion. News breaks and now it’s trading at $1,000 per share. Now how much is the right to buy the stock at $100 per share worth? The answer is going to be something really close to, but maybe a small discount from, $1,000 (current value of the stock) - $100 (how much you pay based on the option) = $900. So what was worth $0.01 yesterday is worth $900 today.
Let’s say you have $10,000 to invest. If you know in advance the news is going to break you can do two things to (probably illegally) try and profit from it.
1. Buy 1,000 shares of the stock for $10/share. 2. Buy 1,000,000 options to buy the stock for $100/share tomorrow with each option costing $0.01.
With strategy 1 you spend $10,000 to buy something that, after the news breaks, is worth $1,000,000. Not bad. But with strategy 2 you spend $10,000 to buy something that’s worth $900,000,000 after the news breaks.
In both cases you’re likely to at least be investigated. And strategy 2 seems especially suspicious because the risk is so high and the non-illegal reasons for doing it are so few and far between. Very few reasons you’d buy a bunch of call options that only pay off if something causes a stock to move dramatically in 24 hours.
Finally, while short-dated, out-of-the-money call options are not something many if anyone should be playing with, they’re just a different flavor of something very familiar. To put it in context a lot of HN readers will understand more intuitively: a call option is what you often receive when you get equity in a startup. It’s the right to purchase shares at a price (strike price) before a certain amount of time (typically 10 years).
This is great, and as good a place as any for the thread to sprawl from, so I'll ask: it depends on how you know the stock is going to shoot up the next day, right? Trading on private information isn't illegal, and there's a huge variety of ways to acquire private information at varying levels of confidence, and in a sense the purpose of the markets is to aggregate everyone's private information to estimate a price.
So a scenario I'm curious about:
Say you're, like, an employee at DataDog, and you're involved in a long-term M&A discussion with Cisco that you know is competitive (I've had the pleasure of witnessing one of these at Arbor Networks). Things are looking great, you've picked up a bunch of strong signals that Cisco is definitely going to make a move, and then: the talks fall apart.
Knowing Cisco, you immediately reach the logical conclusion that they're about to acquire your biggest competitor.
You have no fiduciary duty to Splunk whatsoever. Cisco is, if anything, hostile. Buying Splunk options that are valuable only if Cisco acquires doesn't impact DataDog at all.
Have you violated insider trading laws if you buy the options?
So a scenario I'm curious about:
Say you're, like, an employee at DataDog, and you're involved in a long-term M&A discussion with Cisco that you know is competitive (I've had the pleasure of witnessing one of these at Arbor Networks). Things are looking great, you've picked up a bunch of strong signals that Cisco is definitely going to make a move, and then: the talks fall apart.
Knowing Cisco, you immediately reach the logical conclusion that they're about to acquire your biggest competitor.
You have no fiduciary duty to Splunk whatsoever. Cisco is, if anything, hostile. Buying Splunk options that are valuable only if Cisco acquires doesn't impact DataDog at all.
Have you violated insider trading laws if you buy the options?
Think the super unsatisfying answer is:
¯\_(ツ)_/¯
I think a lawyer would advise that that trade would come with a ton of risk. But the law isn’t clear. Generally, the SEC’s goal is to make sure markets are “fair.” What makes a market fair is hard to define.
If you do a ton of work to launch satellites to fly over Walmart parking lots and then model the correlation of how full they are to what the company’s next earnings will be: that seems like you worked hard and earned an edge you can trade on without getting in trouble. Feels like anyone has a theoretically equal opportunity to do the same work you did and get the same trading edge. That feels fair.
Your hypothetical feels less fair. Is it unfair? Maybe? So unfair that it’d be prosecuted? Probably depends on a number of things, including how much you made on the trade. At a minimum it’s an area of unsettled law. And you would almost certainly be in for serious scrutiny and a legal fight.
Supposedly one idea for Google’s business model early on was that they should use search query data to trade equities. After they researched it they concluded it would be considered insider trading. Though it’s hard to distinguish from overhearing something on the train, which (not legal advice) generally has not been. Think the difference at some level is scale and intention. And, I’d guess, if you made it your business to ride the Acela every day between Greenwich and NYC, bought special hearing aides that let you better eavesdrop on conversations, and made significant profits trading on the information then you’d be more likely to be successfully prosecuted.
But… how is that different from flying satellites over Walmart parking lots?
¯\_(ツ)_/¯
Sometimes the law is intentionally a bit unclear. Usually in areas like this where you care about a general concept of fairness and want some caution and buffer at the margins.
¯\_(ツ)_/¯
I think a lawyer would advise that that trade would come with a ton of risk. But the law isn’t clear. Generally, the SEC’s goal is to make sure markets are “fair.” What makes a market fair is hard to define.
If you do a ton of work to launch satellites to fly over Walmart parking lots and then model the correlation of how full they are to what the company’s next earnings will be: that seems like you worked hard and earned an edge you can trade on without getting in trouble. Feels like anyone has a theoretically equal opportunity to do the same work you did and get the same trading edge. That feels fair.
Your hypothetical feels less fair. Is it unfair? Maybe? So unfair that it’d be prosecuted? Probably depends on a number of things, including how much you made on the trade. At a minimum it’s an area of unsettled law. And you would almost certainly be in for serious scrutiny and a legal fight.
Supposedly one idea for Google’s business model early on was that they should use search query data to trade equities. After they researched it they concluded it would be considered insider trading. Though it’s hard to distinguish from overhearing something on the train, which (not legal advice) generally has not been. Think the difference at some level is scale and intention. And, I’d guess, if you made it your business to ride the Acela every day between Greenwich and NYC, bought special hearing aides that let you better eavesdrop on conversations, and made significant profits trading on the information then you’d be more likely to be successfully prosecuted.
But… how is that different from flying satellites over Walmart parking lots?
¯\_(ツ)_/¯
Sometimes the law is intentionally a bit unclear. Usually in areas like this where you care about a general concept of fairness and want some caution and buffer at the margins.
That framing makes a lot of sense, and does help square the difference between the "satellite imaging of Wal-mart parking lots" and "trading on intel you got working bizdev at a tech company".
It's funny how often "we'll trade equities on the information we generate as a byproduct" comes up --- always briefly --- as a tech company business model. Like, I've non-ironically been involved in companies that had that premise, and then "real" business always swamps the "we'll trade on it" intentions.
It's funny how often "we'll trade equities on the information we generate as a byproduct" comes up --- always briefly --- as a tech company business model. Like, I've non-ironically been involved in companies that had that premise, and then "real" business always swamps the "we'll trade on it" intentions.
So since you mention Wal-Mart. They have, probably, a better idea of Proctor&Gamble's quarterly sales than anybody but P&G, right? Like Walmart makes some massive double digit percentage of sales of p&g products, and knows about it possibly in real-time. If I was some data analyst at Walmart,I couldn't trade on that, that's misappropriation. But Walmart could potentially spin up a hedge fund and trade (against) their suppliers, until their suppliers threaten to pull product, I think?
Presumably there's a contract between Walmart and p&g that they won't trade in each other's stocks, specifically to prevent this?
Presumably there's a contract between Walmart and p&g that they won't trade in each other's stocks, specifically to prevent this?
¯\_(ツ)_/¯
That practice has been referred to recently as "shadow (insider) trading". It's an actively evolving area of case law, but the SEC's opinion is yes, see https://wp.nyu.edu/compliance_enforcement/2022/01/19/sec-v-p...
Or Matt Levine on the same case: https://archive.ph/5Dlmw
Or Matt Levine on the same case: https://archive.ph/5Dlmw
Oh, neat! I hadn't read this, but my hypo is literally case (3). His answer: "who knows?". Excellent.
In my hypo and his, the origin of the private information I've acquired is still business my employer has conducted, so there's a better-than-baseline probability that the SEC would see this as misappropriation --- even if my employer wasn't directly going to trade on this, or if it was hard to trace any harm to my employer, it's still potentially not OK for me to profit from it.
In my hypo and his, the origin of the private information I've acquired is still business my employer has conducted, so there's a better-than-baseline probability that the SEC would see this as misappropriation --- even if my employer wasn't directly going to trade on this, or if it was hard to trace any harm to my employer, it's still potentially not OK for me to profit from it.
The thing where it gets murky though is that the theft argument needs someone to be stolen from, or defrauded.
In classical insider trading, the victims are the investors in the M&A target. I'm misappropriating MNPI about the target, so I'm essentially defrauding the target's investors.
In the "shadow" case, I think it's a harder argument to make. If I work for a potential Cisco M&A target that falls through (as per the GPP), I've got, MNPI about my org, and probably MNPI relating to Cisco. Can I defraud Splunk's investors with that?
In classical insider trading, the victims are the investors in the M&A target. I'm misappropriating MNPI about the target, so I'm essentially defrauding the target's investors.
In the "shadow" case, I think it's a harder argument to make. If I work for a potential Cisco M&A target that falls through (as per the GPP), I've got, MNPI about my org, and probably MNPI relating to Cisco. Can I defraud Splunk's investors with that?
I love this hypothetical. It’s a kind of “triangulation” of insider info, and I have no idea what the prevailing legal theory is. But I’m willing to bet that there is a Matt Levine article that discusses a real world scenario that mirrors this…
> Say you're, like, an employee at DataDog, and you're involved in a long-term M&A discussion with Cisco that you know is competitive (I've had the pleasure of witnessing one of these at Arbor Networks). Things are looking great, you've picked up a bunch of strong signals that Cisco is definitely going to make a move, and then: the talks fall apart.
I don't know about the law, but where I work insider trading policies also applies to vendor and supplier stocks. Trading on that info would cost me a job, at the least.
I don't know about the law, but where I work insider trading policies also applies to vendor and supplier stocks. Trading on that info would cost me a job, at the least.
insider trade? Maybe not. Unethical? Yes. IANAL but this can be grounds for firing and potentially DataDog can sue for misusing what is effectively their confidential information.
What's unethical about it
You’re using confidential information obtained in the course of your work duties for personal gain. I’m pretty sure my employer would consider that a business conduct violation.
But that’s easy to solve for to get to the crux of the issue: what if you realized it and then, on behalf of and with the blessing of your employer traded on the information?
I'm sure it's against the rules but why is it unethical
Because you’re abusing your professional position and employer’s trust for personal gain.
I don't see how, but more importantly I don't see who this harms
> I don't see who this harms
Every trade has a counterpart.
Every trade has a counterpart.
Except those calls just popped into existence in the exchange. So the first trader bought them ex-nihilo.
The fact that you're not one of our esteemed congressmen.
you can have an idea of what will happen but the timing is really important.
options change price considerably depending on the length of the contract, this required surgical precision.
options change price considerably depending on the length of the contract, this required surgical precision.
I didn't have the same question as the OP, but I appreciate and learned from this well written response.. (I had never looked at options grants that way) thank you.
> And strategy 2 seems especially suspicious because the risk is so high and the non-illegal reasons for doing it are so few and far between. Very few reasons you’d buy a bunch of call options that only pay off if something causes a stock to move dramatically in 24 hours.
But why are they then legal to sell? It almost seems like someone wants to be able to sell them, but when they lose the bet they want to revert it. Free money if you're on the correct side.
But why are they then legal to sell? It almost seems like someone wants to be able to sell them, but when they lose the bet they want to revert it. Free money if you're on the correct side.
Sometimes its easier to trade the right to buy/sell something than to trade the thing itself.
It’s less obvious with stocks because there’s a pretty streamlined system for taking delivery of the stock ownership but with physical goods or real estate sometimes actually changing ownership triggers a lot of regulatory or tax or process things.
For example, with real estate if you actually buy it you’ll need at minimum to get insurance to cover if any trespassers or workers get injured on the property. Lots of paperwork to transfer the title/deed, and you might be on the hook to help sort out future title / deed / survey errors. But if you never own it you save the headache of all these things.
For buying commodities you need a safe, regulated warehouse/tank to store it, handle all the ohysical logistics, etc.
By buying and selling the right to purchase the things you can delay the actual purchase until you find someone who can and wants to actually deal with the ownership of the thing.
It’s less obvious with stocks because there’s a pretty streamlined system for taking delivery of the stock ownership but with physical goods or real estate sometimes actually changing ownership triggers a lot of regulatory or tax or process things.
For example, with real estate if you actually buy it you’ll need at minimum to get insurance to cover if any trespassers or workers get injured on the property. Lots of paperwork to transfer the title/deed, and you might be on the hook to help sort out future title / deed / survey errors. But if you never own it you save the headache of all these things.
For buying commodities you need a safe, regulated warehouse/tank to store it, handle all the ohysical logistics, etc.
By buying and selling the right to purchase the things you can delay the actual purchase until you find someone who can and wants to actually deal with the ownership of the thing.
It wasn't really a question about options in general, but these specific options. If they are either basically free money for the seller, or suspicious trading by the buyer, why allow both sides to trade like this?
The seller is basically stealing money from a "sucker", until they suddenly aren't. No value in allowing those kind if bets, then. Where the seller either wins or claim fraud. Very one sided.
The seller is basically stealing money from a "sucker", until they suddenly aren't. No value in allowing those kind if bets, then. Where the seller either wins or claim fraud. Very one sided.
From my understanding the SEC would end up taking the profits if the prosecution is successful? The seller here is not free rolling by claiming fraud on losses.
The option could be used as a low cost hedge against another trade and may end up being cheap insurance for a very unique event
Options are legal to sell because in MOST cases (where insider trading is not happening), selling call options is a nice way to get "free money" (*note not actually free) and facilitates hedging and liquidity in the market. It's a financial product like any other.
Let's take a boring case -- that $10 stock is NOT going to $1000 tomorrow, they're not finding a cure for cancer, etc. So 99.9999999/100, if you sold someone the option for $.01, it's going to expire worthless tomorrow. You have 1M shares, you sell the call options for 1M * $.01 = $10,000.
You let some other people place bets on a thing that might (but probably won't) happen, and you get $10,000 just for owning the stock. It's like an interest payment (with some risk).
If the thing DOES happen, you are taking a risk that you'll have to sell your stock for slightly less than if you'd held it, so you're giving up some potential gains.
But in the long run, this is all priced out and balances out (in theory, in an efficient market). You get $10,000 in "interest" but are taking the risk that you might lose some upside in a black swan event, and the buyers are paying a nominal amount to take a bet on the other side. They might have spent $10k in order to possibly make a $billion -- those are risks that some people price and want to take (like a lottery).
Let's take a boring case -- that $10 stock is NOT going to $1000 tomorrow, they're not finding a cure for cancer, etc. So 99.9999999/100, if you sold someone the option for $.01, it's going to expire worthless tomorrow. You have 1M shares, you sell the call options for 1M * $.01 = $10,000.
You let some other people place bets on a thing that might (but probably won't) happen, and you get $10,000 just for owning the stock. It's like an interest payment (with some risk).
If the thing DOES happen, you are taking a risk that you'll have to sell your stock for slightly less than if you'd held it, so you're giving up some potential gains.
But in the long run, this is all priced out and balances out (in theory, in an efficient market). You get $10,000 in "interest" but are taking the risk that you might lose some upside in a black swan event, and the buyers are paying a nominal amount to take a bet on the other side. They might have spent $10k in order to possibly make a $billion -- those are risks that some people price and want to take (like a lottery).
The illegal part in this equation comes from the asymmetric nature of the bet. Not many sane people play naked way out of money options. 99% of the time it is a losing trade. It is like playing the lottery. Perfectly legal. But being suspicious when someone who doesn’t play lottery buys one and wins next day.
While a hedged out of money option is commonplace. various payoffs you can create with options is mind boggling.
While a hedged out of money option is commonplace. various payoffs you can create with options is mind boggling.
The “naked” doesn’t apply here, the guy just bought some options. Naked/covered refers to selling options.
The issue is more that one entity bought so many.
If this was e.g. 1 million different buyers of 1 option each instead of 1 buyer of 1 million options this would be a non-story.
If this was e.g. 1 million different buyers of 1 option each instead of 1 buyer of 1 million options this would be a non-story.
> But why are they then legal to sell?
Things are legal until there is a law or ruling that makes them illegal
Things are legal until there is a law or ruling that makes them illegal
It just feels like a casino, where if you win you get sent to jail. No risk for the house. No upside for the gambler.
Well no, because there is nothing illegal about the trade itself nor the profit.
What's illegal is to use insider info to make the decision to do the trade. Did the entity making this trade use insider info? We don't know. If they did not, nothing wrong with the trade.
Now, the circumstances are such that this reeks of insider info. Nobody sane would have done that trade otherwise. So hopefully the SEC will investigate fully. If it turns out the trader really did not have any connection to either of these companies and had no knowledge of the acquisition and simply made the luckiest bet of their life.. then that's fine.
What's illegal is to use insider info to make the decision to do the trade. Did the entity making this trade use insider info? We don't know. If they did not, nothing wrong with the trade.
Now, the circumstances are such that this reeks of insider info. Nobody sane would have done that trade otherwise. So hopefully the SEC will investigate fully. If it turns out the trader really did not have any connection to either of these companies and had no knowledge of the acquisition and simply made the luckiest bet of their life.. then that's fine.
> Nobody sane would have done that trade otherwise.
But my point is that there were people on the other side more than willing to take that person's money. If "no one sane" would do that trade, why let the other side be able to profit of it until suddenly it wasn't free money? Why shouldn't the other side carry any risk?
But my point is that there were people on the other side more than willing to take that person's money. If "no one sane" would do that trade, why let the other side be able to profit of it until suddenly it wasn't free money? Why shouldn't the other side carry any risk?
> But my point is that there were people on the other side more than willing to take that person's money.
What else would you propose?
Designing an algorithm that prevents people from offering or taking bad trades would require a reliable crystal ball. Solving the halting problem sounds easier.
What else would you propose?
Designing an algorithm that prevents people from offering or taking bad trades would require a reliable crystal ball. Solving the halting problem sounds easier.
Not necessarily - if you're a hedge fund and you think you have an algorithm that can predict gains just a tiny bit better than the call option's seller, then 99 times out of 100 you lose $x but that last 1 in 100 you might gain $x*150, and on average make money.
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This is an excellent answer for someone who has no idea about finances, thank you.
The only thing I would change is "perfects cold fusion" to "discovers cold fusion" :)
The only thing I would change is "perfects cold fusion" to "discovers cold fusion" :)
What does out of the money mean?
https://www.investopedia.com/ask/answers/042715/what-differe...
Out of the money call options are long shots, you'd loose money to buy the stock today via the option vs just buying on the open market.
Ah that makes sense, thank you!
You pretty much explained it yourself.
The price of SPLK had no reason to jump to or beyond $127 without some catalyst event so the options were almost worthless. But with the acquisition, the stock had a catalyst and with the share price jumping to $145, those options gained a crap load of intrinsic value (basically the difference of $145 - $127).
Now either the purchaser got really really lucky or had insider information that the acquisition was going to happen. The latter seems much more likely.
The price of SPLK had no reason to jump to or beyond $127 without some catalyst event so the options were almost worthless. But with the acquisition, the stock had a catalyst and with the share price jumping to $145, those options gained a crap load of intrinsic value (basically the difference of $145 - $127).
Now either the purchaser got really really lucky or had insider information that the acquisition was going to happen. The latter seems much more likely.
> without some catalyst event
Most subtle Cisco joke in the whole thread. Hat tip.
Most subtle Cisco joke in the whole thread. Hat tip.
No explanation needed. You got it.
An options contract gives you the right to buy or sell a security to a counterparty at a fixed price at any time on or before the expiration date.
As you note, the chances of being able to buy a share from someone on or before Friday for $127 (when the stock was publicly trading below that) was near valueless ($.04). Not anymore!
An options contract gives you the right to buy or sell a security to a counterparty at a fixed price at any time on or before the expiration date.
As you note, the chances of being able to buy a share from someone on or before Friday for $127 (when the stock was publicly trading below that) was near valueless ($.04). Not anymore!
Could you please explain more about who these counterparties are exactly? Do they include brokerages?
I'm trying to understand why a counterparty would enter into an arrangement where a stock price change obligates them to financial liability like this. Presumably there's some upside if the stock price goes the other way, but it's unclear who the $ would come from in that case.
Also: Who originates options? When someone buys an option, is it the brokerage who collects the fees? Is the counterparty already involved at that point?
I'm trying to understand why a counterparty would enter into an arrangement where a stock price change obligates them to financial liability like this. Presumably there's some upside if the stock price goes the other way, but it's unclear who the $ would come from in that case.
Also: Who originates options? When someone buys an option, is it the brokerage who collects the fees? Is the counterparty already involved at that point?
Let's say I own a bunch of SPLK and want to make some passive income. I am the counterparty to the call purchaser in this example.
I can sell call options 10% out of the money each week and make some nice cash. If my plan was to hold the stock long term, there's no downside risk because if the stock goes down, I get to keep the cash (premium) from selling the calls. If it goes sideways or slightly up I get to keep it as well.
The only "downside" is it goes up >10% in which case i've made that 10% + premium, but I've now had my stock taken away from me.
In this case, I lose out on an additional 10% in upside because it went up 20% overnight.
I can sell call options 10% out of the money each week and make some nice cash. If my plan was to hold the stock long term, there's no downside risk because if the stock goes down, I get to keep the cash (premium) from selling the calls. If it goes sideways or slightly up I get to keep it as well.
The only "downside" is it goes up >10% in which case i've made that 10% + premium, but I've now had my stock taken away from me.
In this case, I lose out on an additional 10% in upside because it went up 20% overnight.
That still seems like a pretty good deal. You missed out on capturing the entire upside, but lost no real money.
Loss aversion and all that, but it feels like a reasonable strategy where you still come out ahead in the worst case. In the typical case, you can continue to collect those pennies.
Loss aversion and all that, but it feels like a reasonable strategy where you still come out ahead in the worst case. In the typical case, you can continue to collect those pennies.
> In the typical case, you can continue to collect those pennies.
Top notch comment, considering options trading is often described as "picking up pennies in front of a steamroller."
> Loss aversion and all that, but it feels like a reasonable strategy where you still come out ahead in the worst case
You don't come out ahead in the worst case – the option you wrote can settle deep ITM and you are compelled to sell a stock at a loss. Worst case you could lose a major chunk of change.
Top notch comment, considering options trading is often described as "picking up pennies in front of a steamroller."
> Loss aversion and all that, but it feels like a reasonable strategy where you still come out ahead in the worst case
You don't come out ahead in the worst case – the option you wrote can settle deep ITM and you are compelled to sell a stock at a loss. Worst case you could lose a major chunk of change.
> You don't come out ahead in the worst case
But you were offering it based on the market price when you offered it. The "loss" is merely one of opportunity, you're not actually losing any value you had when you sold the option, right?
But you were offering it based on the market price when you offered it. The "loss" is merely one of opportunity, you're not actually losing any value you had when you sold the option, right?
If you sold the option and don't hold the stock then you are exposed to essentially uncapped losses.
Listed scenario started by saying you own SPLK.
Correct, but this sub-section of the thread veered off into the naked options territory and I was simply trying to clear up the confusion of the person I was replying to.
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Clearly I am not an option trader, but so long as you own the option you are selling (covered) doesn’t that make your maximum loss the stock itself (+potential profit from the positive movement). I thought ruin can only happen if you are selling naked?
Suppose I buy 100 shares of $ABC for $10 (total cost for me is $1000) and then sell a call option for $1 with a strike price of (say) $50. The absolute worst case scenario is that the value of my *shares* goes to $0, in which case I've lost $999.
On the other hand, if the price shoots up to, say, $85, I'm still obligated to sell them at $50. Since I bought them at $10, I've still made $4001 profit, but I'm still dissatisfied because I would have made $7500 if I hadn't sold the call option.
What you're describing is what happens if I don't already own those shares and the price skyrockets. If the counterparty exercises their $50 option when the current price is $85, then yes, I'm obligated to buy the shares at market price and sell for a total loss of ($STRIKE_PRICE * 100) - $5000 - 1.
On the other hand, if the price shoots up to, say, $85, I'm still obligated to sell them at $50. Since I bought them at $10, I've still made $4001 profit, but I'm still dissatisfied because I would have made $7500 if I hadn't sold the call option.
What you're describing is what happens if I don't already own those shares and the price skyrockets. If the counterparty exercises their $50 option when the current price is $85, then yes, I'm obligated to buy the shares at market price and sell for a total loss of ($STRIKE_PRICE * 100) - $5000 - 1.
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I'm not sure this is a true story.
Open Interest is 420 contracts, this is a max number of options someone can hold (for that strike and expiry). See the first line on the first screenshot, just below "Historical Volume / OI". Nobody could hold more than that much contract.
Edit: The total contracts is 127, so it gives 127 x $18 x 100 ~ $230'000 profit. (Seems like the post on Twitter is missing x10 factor.)
Open Interest is 420 contracts, this is a max number of options someone can hold (for that strike and expiry). See the first line on the first screenshot, just below "Historical Volume / OI". Nobody could hold more than that much contract.
Edit: The total contracts is 127, so it gives 127 x $18 x 100 ~ $230'000 profit. (Seems like the post on Twitter is missing x10 factor.)
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I know options well, but I dont understand how spreads didnt react to this volume. Wouldnt the asks go higher and higher and higher with that volume? Also, what insane market maker would offer this much volume and take the downside risk? It isnt even clear how they would offlay such a risk unless they just happened to be holding 550k*100 SPLK shares
>what insane market maker would offer this much volume and take the downside risk?
At the time the downside risk was near zero, right? It was basically free money for them ... till it wasn't!
the market maker still collected $22,000 in premium if they bought shares after selling the options, thats motivation enough to fill the entire order at a good price before another market maker does. you can write unlimited options, so without scarcity the bid and asks don't have to change if the buyer can be a little patient.
but if they only tried to keep up with the delta then they might not have bought enough shares and have some losses right now, on that one position
they can take losses its a risk
but if they only tried to keep up with the delta then they might not have bought enough shares and have some losses right now, on that one position
they can take losses its a risk
Important note: he didn't buy 550k options, he bought 26k, for a total profit of $475k. The tweet is incorrect. See https://news.ycombinator.com/item?id=37602079
No. He bought 260 options, which translate into the right, but not the obligation to purchase 26k shares at a certain price.
260 options is WSB lotto territory. At $4 each, that’s a thousand dollar bet. We’re not exactly talking big money here.
260 options is WSB lotto territory. At $4 each, that’s a thousand dollar bet. We’re not exactly talking big money here.
I know it's 260 options, but I wrote "26k" as it's the right to buy 26k shares (1 option for 100 shares), for consistency with the parents who wrote 550k, meaning 5500 options to buy 550k shares.
In fact, I was right. It was a WSB lotto trade. Guy is just a regular WSB trader who has made multiple trades on this ticker in the past.
I mean, it sounds like you have it, what's the question
An accounting professor I once had called trades like this “speed dialing the SEC from your Bloomberg”.
Even if it’s legit, this trader is going to be spending a lot of time giving depositions over the next few months.
Even if it’s legit, this trader is going to be spending a lot of time giving depositions over the next few months.
Yup.
Obviously I don't condone insider trading, but it's nice to see someone go all in and make some real money. If you're going to risk jail time, you might as well do it for life-changing amounts of cash.
Contrast this with Stephen Buyer who's going to trial and may well end up in jail for a piddly few $100k.
Contrast this with Stephen Buyer who's going to trial and may well end up in jail for a piddly few $100k.
I expect this trade will indeed change the trajectory of their life.
I would like to buy a Reverse Iron Butterfly on the trajectory of this trader's life.
Unless the trader is a lawmaker (or their family) who found out about this through the nature of their job. Congress is more-or-less exempt from insider trading laws if the information is acquired as part of their job.
As in go to jail? I’m pretty sure yes.
You must be new to the United States. Only the poors go to jail (except in the most extreme cases like Epstein, and it still took them 20+ years to do anything to him.
As a non-american it's always fascinating to see comments like this downvoted.
It's absolutely mostly the poor who go to jail except a few fall guys - it's very apparent.
That's class privilege for you guys, and it has been like this for hundreds of years in most societies but only americans seem to "miss" this or whatever the hell is going on.
Just as here in the EU, fraud in elite circles shuffles billions every day while everyone focuses on petty crime and sensational cases.
Wars have killed millions for resource political gains and entire economies have been fucked over to benefit tiny circles of the richest - and none of these people have ever gone to jail.
The control that the uppermost echelons has over the flow of information in this new social cybernetic system we've all been forced into is so efficient, it's almost unbelievable lol.
It's absolutely mostly the poor who go to jail except a few fall guys - it's very apparent.
That's class privilege for you guys, and it has been like this for hundreds of years in most societies but only americans seem to "miss" this or whatever the hell is going on.
Just as here in the EU, fraud in elite circles shuffles billions every day while everyone focuses on petty crime and sensational cases.
Wars have killed millions for resource political gains and entire economies have been fucked over to benefit tiny circles of the richest - and none of these people have ever gone to jail.
The control that the uppermost echelons has over the flow of information in this new social cybernetic system we've all been forced into is so efficient, it's almost unbelievable lol.
It sounds like you do disagree with the comment you're defending, though- they're suggesting that this is a US specific phenomenon. The US may be worse in this regard, but I don't know where to find relevant statistics (looked into this for ~30 minutes), or how you would go about controlling for the US being both wealthier and more criminal than a lot of the world. Would love to learn more about this!
Part of it is justifiable. The value of a prison is threefold. It's a punishment, and in that sense it shouldn't be exclusive to the poor. But it's also a way to separate violent criminals from the rest of the population, reducing further violence. A financial criminal can just be denied access to the industry to achieve that end. And it's an opportunity for rehabilitation, but that doesn't seem to be a priority in the US anyway.
Part of it is justifiable. The value of a prison is threefold. It's a punishment, and in that sense it shouldn't be exclusive to the poor. But it's also a way to separate violent criminals from the rest of the population, reducing further violence. A financial criminal can just be denied access to the industry to achieve that end. And it's an opportunity for rehabilitation, but that doesn't seem to be a priority in the US anyway.
Just note it is most likely the person who did this was poor compared to whoever was on the other side of this trade.
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Wow, I guess SBF is a pauper then.
He’s new money.
People like SBF, Holmes etc, fucked over other super rich and often way more powerful people. That's why they are being punished. If they did smth like screw up 5 milion normal citizens for a 1000$ each, they'd still have their billion dollar fraud, but no serious punishment for it.
On the contrary, to be a successful criminal you have to learn to stay under the radar. Yes millions might be available for the taking, but in doing so you will most certainly get caught. On the other hand no one will blink an eye at a trade that nets you a few hundred K, and that is still a significant amount of money.
And the one day thing. What would a more modest number of options one month or six months out have looked like. That falls well into the I had a feeling territory based on these things I read.
> On the other hand no one will blink an eye at a trade that nets you a few hundred K, and that is still a significant amount of money.
I wonder if that's actually true for a normal person, or if automated analytics would be looking at the relative value of your portfolio rather than just looking for the biggest wins in absolute terms.
I wonder if that's actually true for a normal person, or if automated analytics would be looking at the relative value of your portfolio rather than just looking for the biggest wins in absolute terms.
Wouldn't they be required to give profits back if convicted?
Because otherwise lots of people would've taken this sort of calculated risk already.
Because otherwise lots of people would've taken this sort of calculated risk already.
Yes. And the larger the amount, the longer the sentence - federal government has a point a system that dictates this.
So erm, yeah, don’t do this.
So erm, yeah, don’t do this.
Would I be able to see such a trade when the trader makes them and just copy the trade with a small amount.
Thinking is: „Who the hell would make such a trade if he doesn’t have some information, let’s do the same“
Thinking is: „Who the hell would make such a trade if he doesn’t have some information, let’s do the same“
The screenshots demonstrate the trader purchased only $1,040 worth of options, not "$22,000" as claimed in the tweet. So the trader turned $1k into $475k.
See the first photo in the tweet, the top left chart (45-day volume on the SPLK 127 C 09/22/2023 options) shows a volume of about 260 options was bought. The second photo confirms a volume of 260 (see "volume" column, first row).
Options are for 100 shares. So 260 options times 100 shares times $0.04 equals $1,040. Meaning the insider trader turned $1,040 into $475,000.
(Edited my math - an option is $4 as it's for 100 shares - thanks pc86.)
See the first photo in the tweet, the top left chart (45-day volume on the SPLK 127 C 09/22/2023 options) shows a volume of about 260 options was bought. The second photo confirms a volume of 260 (see "volume" column, first row).
Options are for 100 shares. So 260 options times 100 shares times $0.04 equals $1,040. Meaning the insider trader turned $1,040 into $475,000.
(Edited my math - an option is $4 as it's for 100 shares - thanks pc86.)
And the 260 shares could as far as we know have been bought by several different people, correct? It's just the total volume for the day, traded in several dozen clips.
I don't have the time and sales in front of me to see the exact fact pattern, but yes, that it's a possibility. It's also possible these options were a part of a spread. That is, this trader sold other calls that lost a lot of money at the same time they bought these ones.
In the Google Legal building, the department that dealt with acquisitions was behind a locked door. Most badges did not open it.
> a locked door.
That's not a very efficient way to stop information leaks. It's not like ones and zeroes are delivered through open doors..
It will work against Big Bad Wolves, especially if your house is made of bricks.
That's not a very efficient way to stop information leaks. It's not like ones and zeroes are delivered through open doors..
It will work against Big Bad Wolves, especially if your house is made of bricks.
No, but people can walk by your desk and see what you're working on. Or look in the conference room and see what's on the whiteboard.
Not doing that would be Security Malpractice.
Not doing that would be Security Malpractice.
In an M&A you do not use the names of actual companies, but code names - exactly for that reason. There is just a very limited amount of documents that actually mention the target company (on both sides, and tt the lawyers')
If there's anything on the whiteboard it's extremely easy to snap a pic and infer from context on what company it actually is.
But yes all these steps should be necessary to minimize risks.
But yes all these steps should be necessary to minimize risks.
and yet it still leaks out. That's why we have gov't watchdogs watching the trading.
74th rule of acquisitions: Knowledge equals profit.
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What’s the relationship between Google, Cisco and Splunk?
insider info on mergers. Control of info on M&A is a constant worry for any corporation. And anyone who works in it has to get the lecture from Legal about how you cannot profit from it, so don't try.
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Let's say you live in front of the Splunk office, and you see tens of people in suits, a limo with a CISCO sticker, as well as a lot of commotion on the office in front of you. You strongly suspect something is happening, you buy $22k of Splunk calls.
Is that insider trading?
Is that insider trading?
If I may comment on this issue in the abstract: don't count on technicalities to get you out of legal trouble. Those are fine if you're very wealthy and have money for the types of lawyers and appeals that can use them. For everyone else, you don't want to be so close to the line that you end up losing because the judge doesn't like your face and woke up on the wrong side of the bed.
I'm not a lawyer, and I'm sure there's one that would make the argument that it is. But generally, hedge funds do very similar things to predict mergers: https://www.bloomberg.com/news/articles/2019-07-02/hedge-fun...
Based on the compliance training I did this week at a hedge fund…
On the condition that you acted solely on information that was already public, or something that happened in a public place that you happened to witness as a bystander…
No, that is not usually considered insider trading.
Not a lawyer, not advice.
On the condition that you acted solely on information that was already public, or something that happened in a public place that you happened to witness as a bystander…
No, that is not usually considered insider trading.
Not a lawyer, not advice.
Disclaimer: not financial advice
I don't think so, it happened publicly, you weren't privvy to classified details. I would go for it if I were in that scenario.
I don't think so, it happened publicly, you weren't privvy to classified details. I would go for it if I were in that scenario.
If it's legal, it means that somebody could write a model that could predict mergers pretty accurately and make a lot of money. For instance, by tracking flight patterns of C-suites executives, scanning car brands in parkings next to offices using satellite images, and analysing working hours of the staff (this can be done in multiple ways like sending e-mails to check of automated OOO responses or analysing the light coming out of the building from satellite images.)
You can buy the flight data right from Nasdaq if you want to: https://data.nasdaq.com/alternative-data/corporate-aviation-...
But if it's that easy that means other people are already doing it and you probably can't make any money.
Plenty of companies will help you monitor parking lots too: https://orbitalinsight.com/geospatial-solutions/financial-se..., https://rsmetrics.com/asset-tracker/
The general term for this stuff is "alternative data".
But if it's that easy that means other people are already doing it and you probably can't make any money.
Plenty of companies will help you monitor parking lots too: https://orbitalinsight.com/geospatial-solutions/financial-se..., https://rsmetrics.com/asset-tracker/
The general term for this stuff is "alternative data".
A version of this is already happening: https://www.theatlantic.com/magazine/archive/2019/05/stock-v...
I think some analysts have been doing flight analysis for a long time to help inform trades.
Everything you listed is publicly accessible knowledge (there is an interesting conversation over the fact that a poor person is unlikely to have the available means to attain this information) and I think should be fair game. But I really have not done the legal research to confidently give you a “Yes” and willfully will exit so I don’t get some SEC agent knocking on my door.
Everything you listed is publicly accessible knowledge (there is an interesting conversation over the fact that a poor person is unlikely to have the available means to attain this information) and I think should be fair game. But I really have not done the legal research to confidently give you a “Yes” and willfully will exit so I don’t get some SEC agent knocking on my door.
> by tracking flight patterns of C-suites executives, scanning car brands in parkings next to offices using satellite images
This was old enough to be the stuff of office legends fifteen years ago. (Also, flying drones to thermally image petroleum tankers to infer their levels.)
This was old enough to be the stuff of office legends fifteen years ago. (Also, flying drones to thermally image petroleum tankers to infer their levels.)
Hypothetically, if you assume somebody else will go through all that, wouldn't it be easier to acquire market data and follow unusual trades?
This happens already.
And what if you are the caterer being sent to the Splunk office to deliver some lavish celebratory meal?
Would I be able to see such a trade when the trader makes them and just copy the trade with a small amount.
Thinking is: „Who the hell would make such a trade if he doesn’t have some information, let’s do the same“
Thinking is: „Who the hell would make such a trade if he doesn’t have some information, let’s do the same“
You still don't know the exact date of the potential acquisition. So you cannot make a successful trade. I would say it's not insider trading.
Maybe it was just one leg of an option spread. Selling ATM/Slightly OTM call and hedged with buying deep OTM.
I don't know if this is genuinely suspicious or not. Is buying 20K of options an unusual thing? Or is this something that happens regularly with options expiring worthless or with a small gain - and it just happened to hit big this time?
IE "someone bought a lottery ticket and won" - interesting to know if they play the lottery every other day (and don't usually win?)
IE "someone bought a lottery ticket and won" - interesting to know if they play the lottery every other day (and don't usually win?)
It's definitely suspicious and will probably be looked into. If it turns out it's a trader who regularly buys soon-to-be-expiring option calls, maybe it'll fly. But if the trade was made by someone who doesn't regularly make $20,000 options bets, they will need a good explanation.
Why will they need a good explanation? Can't they just say I lucked out and the burden of proving insider trading would fall on the SEC? Innocent until proven guilty right?
If they did not usually trade in such options but suddenly started doing so the day before it had a major market-moving event, that could be the type of "reasonable suspicion" that you need to get a search warrant from a judge. From there on, investigators could demand access to (say) electronic communications to determine if the person doing the trade got a text from a friend saying "yo buy 20k of short term call options on Splunk you won't regret it bro" or something similar.
Especially if the person doing the trade is found to be employed by (or closely related to someone employed by) Cisco or Splunk or one of their banks.
Especially if the person doing the trade is found to be employed by (or closely related to someone employed by) Cisco or Splunk or one of their banks.
Yes, if the SEC chooses to refer to the US Attorney then the gov't will need to prove to a jury that insider trading occurred.
But, to start, the SEC will just come knocking and asking questions. If you have a good explanation then they'll go away. But if you don't then they'll keep digging, get warrants, etc.
If it's some random hedge fund that makes these bets all the time then the SEC will probably go away. If it's a broke old lady who opened her brokerage account a week ago then it's pretty clear what's going on, and they'll have the tools they need to turn the screws and get to the bottom of it. And if it's someone whose wife works in Cisco M&A then it'll be pretty open and shut because these kinds of mergers keep track of who had access to what info, for exactly this reason.
But, to start, the SEC will just come knocking and asking questions. If you have a good explanation then they'll go away. But if you don't then they'll keep digging, get warrants, etc.
If it's some random hedge fund that makes these bets all the time then the SEC will probably go away. If it's a broke old lady who opened her brokerage account a week ago then it's pretty clear what's going on, and they'll have the tools they need to turn the screws and get to the bottom of it. And if it's someone whose wife works in Cisco M&A then it'll be pretty open and shut because these kinds of mergers keep track of who had access to what info, for exactly this reason.
They could probably just tell the SEC, "I think you're a bunch of stupid doodooheads" and see how well that works.
Works great if your rich enough.. Maybe they will go private at $420 a share.....
I've been downvoted here before for telling people what Musk says SEC stands for. But this guy didn't make plutocrat money off the trade, so he should watch his back for sure.
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A jury gets to decide whether the evidence proves the crime. Do you think a prosecutor could convince the jury that no reasonable person would make that bet without insider knowledge?
"short-dated out-of-the-money call options that cash out a day after a merger/acquisition" is, like, the definition of a suspicious transaction. Somebody's gonna get a knock on the door from the SEC.
Maybe unless that person was a US senator/congressperson.
If they obtained info about this through their role as a senator/congressperson, and not just through normal channels. If I understand it correctly:
Insider trading off of classified or whatever info they get from their senate/congress job - not illegal (though imo it should be illegal). (Edit: as mandevil points out, strictly speaking illegal, but largely uneforceable/unenforced)
Insider trading off of info they got from their buddy at XYZ place who knew about something ahead of time, unrelated to their senate/congress job - still illegal, same as for other people.
Insider trading off of classified or whatever info they get from their senate/congress job - not illegal (though imo it should be illegal). (Edit: as mandevil points out, strictly speaking illegal, but largely uneforceable/unenforced)
Insider trading off of info they got from their buddy at XYZ place who knew about something ahead of time, unrelated to their senate/congress job - still illegal, same as for other people.
Why don’t people track the investments of senators and congresspeople and race to follow them? It seems like an easy way to get nearly insider trading.
This is a thing: https://www.quiverquant.com/sources/senatetrading
In 2013 the electronic disclosure part of the 2012 STOCK act was removed, so they can just disclose in some way you can't follow.
Because:
> Trades executed by lawmakers or their families must be disclosed within 45 days of execution
Is probably an issue (it's it's actually insider trading).
People do track it, though:
https://www.capitoltrades.com/politicians
> Trades executed by lawmakers or their families must be disclosed within 45 days of execution
Is probably an issue (it's it's actually insider trading).
People do track it, though:
https://www.capitoltrades.com/politicians
As in they need to announce them 45 days before they make them? Or 45 days after?
After.
We really ought to make them disclose them in advance like CEOs.
I would be 100% supportive of all congresspeople being required to file 10b5-1 plans in advance for the whole year, for any stock holdings
Right, they still get legally protected insider trading otherwise.
The public ought to benefit from the same insights and info.
And if a trade disclosure would be considered a threat to national security for some reason, you don’t make the trade.
The public ought to benefit from the same insights and info.
And if a trade disclosure would be considered a threat to national security for some reason, you don’t make the trade.
Has anyone calculated how much $$$ has been made by Congress folks due to this type of trading?
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After
This is false. Then-sitting Congressman Chris Collins (R-NY) pled guilty and was sentenced to 26 months in prison for insider-trading back in 2019-2020. He was pardoned by President Donald Trump as one of his last official acts as President, but Collins still spent 10 weeks in prison for insider-trading as a sitting congressman (this was for knowledge he gained outside of his duties as a congressman, it was knowledge he got as a member of the Board of a company).
Congresspersons separately aren't allowed to trade on things they learn from their job- that was banned in 2012 under the STOCK act.
Congresspersons separately aren't allowed to trade on things they learn from their job- that was banned in 2012 under the STOCK act.
Banned, but not enforced, and due to the 2013 removal of electronic disclosure requirements, harder to detect?
https://campaignlegal.org/update/part-2-stock-act-failed-eff...
https://campaignlegal.org/update/part-2-stock-act-failed-eff...
Eh, my take is that the electronic disclosure stuff makes this more annoying for the activists- the people who are building dashboards of Congressional performance etc.- but doesn't fundamentally change the nature of the problem. The activists still build their dashboards, still comb through the documents and find things that look really bad, it's just slightly more out of date and slightly more work for them.
I do think that something like the Ban Congressional Stock Trading Act (everything in a blind trust), or its even more draconian (no blind trusts, just sell!) Ban Stock Trading for Government Officials Act will probably pass, eventually. Those are general markers for where we are going. But to just say "It's not illegal if you are a Member of Congress" is flat wrong and encourages a level of cynicism that makes it harder to actually fix the problems we face today.
I do think that something like the Ban Congressional Stock Trading Act (everything in a blind trust), or its even more draconian (no blind trusts, just sell!) Ban Stock Trading for Government Officials Act will probably pass, eventually. Those are general markers for where we are going. But to just say "It's not illegal if you are a Member of Congress" is flat wrong and encourages a level of cynicism that makes it harder to actually fix the problems we face today.
And really, the stuff banned by the STOCK act is separate from insider trading which is why it needed a separate rule.
But lottery-ticket options trading is done all the time. The fact that the options expire the next day is part of the strategy (because before that, the options cost more). $20k might sound like a big stake but you don't know the size of the trader's portfolio, it might be 0.01% of it, and they didn't stand to lose the whole thing necessarily.
All true in the abstract. But doing it the day before an acquisition is always gonna earn you a door knock, even if you're a serial gambler.
Yeah, this is not that suspicious IMO. The trade was opened yesterday when Splunk was at $119. They just needed a 7% gain by Friday to be profitable on their $127 calls. Traders make those kind of gambles all the time.
Not at this volume. Also, typically they do it for indices and typically based on some event (e.g., rate announcement), not on a heels of an unknown acquisition.
Buying 20k of options when there's a 99.99% chance of them being worth $0 is pretty unusual, unless you're actively regularly trading in the millions.
// unless you're actively regularly trading in the millions.
A lot of people/organizations bet in the millions.
A lot of people/organizations bet in the millions.
Sure, and the SEC investigation will probably figure out if this is one of a thousand daily trades that got placed by the beneficiary, or if he opened a trading account last week, and this is the first time he's buying options.
That was the point of the post you originally replied to...
Even worse than opening a trading account last week: they've got a looooong history of doing nothing but the most boring buy-and-hold-index-funds investing you can imagine, until they suddenly bought 20k in lottery tickets that just happened to hit their one-in-a-billion chance to pay out.
Or you're a subscriber to /r/wallstreetbets
It’s a pretty common occurrence in r/wallstreetbets
Go directly to jail, do not pass go, do not collect $10M.
Unless they are a politician :/
https://blogs.luc.edu/compliance/?p=4459
https://blogs.luc.edu/compliance/?p=4459
You’ll note that opinion piece never actually outlines any special immunity from insider trading rules that Congress people have. What it’s really outlining is that the normal rules for insider trading aren’t enough for Congress people. Which is a reasonable position to take, but it’s not what the headline implies.
There is no special immunity for insider trading for Congress. https://www.everycrsreport.com/files/20170412_RS21127_36174d...
There is no special immunity for insider trading for Congress. https://www.everycrsreport.com/files/20170412_RS21127_36174d...
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isn't it closer to 400k?
I think $10M is right. The options cost $0.04 each yesterday (per the tweet), so spending $22,000 would get you 550000 options. Those options are now worth $18.30 (per the tweet) for a total value of ~$10M.
An option contract with an ask of $0.04 costs $4. The trader bought 5500 options for $4 and they’re now worth $1830, so it’s still a $10M profit.
The listed option price is the price per share, and a standard option contract is 100 shares of exposure.
The listed option price is the price per share, and a standard option contract is 100 shares of exposure.
No, the trader bought 260 options. See second photo in the tweet, first row, column "volume". 260 options times $4 equals $1,040 invested, which turned into $475k.
None of the images in the tweet show either premium of $22k or 5,500 option contracts (eg options on 550,000 shares). What am I missing?
The screenshots seem to show a total traded volume for yesterday of 260 contracts (26,000 shares), way smaller than what was suggested.
Furthermore, nothing makes it clear that these were all the same person. And the open interest went down that day so at least some of this volume was buying to cover.
The screenshots seem to show a total traded volume for yesterday of 260 contracts (26,000 shares), way smaller than what was suggested.
Furthermore, nothing makes it clear that these were all the same person. And the open interest went down that day so at least some of this volume was buying to cover.
You are correct. The amount "$22,000" purchased options quoted in the tweet is not supported by the screenshots which show 260 options were purchased, for a total of $1,040, which is now worth $475k. See https://news.ycombinator.com/item?id=37602079
$22k * ($18.30/$0.04) = $10.065M
22K * 45560 / 100 = 10023200
swarnie(2)
Where's the line for insider trading on something like this? Say you were a low level Splunk or Cisco employee and you had a hunch the acquisition was going to close sometime this week (you're not working on the deal, you just heard through the grapevine that it's happening). Is that considered insider trading?
> Is that considered insider trading?
AFAIU, the use of material non-public information always qualifies as insider trading. It does not matter how you got it, and it does not even matter if you work at the company.
See https://www.investopedia.com/terms/m/materialinsiderinformat...
AFAIU, the use of material non-public information always qualifies as insider trading. It does not matter how you got it, and it does not even matter if you work at the company.
See https://www.investopedia.com/terms/m/materialinsiderinformat...
Oh, but it does matter. Insider trading is a kind of theft. A theft from the person or company that had the info and (generally) whose trust you violated.
If you develop the info yourself (say, monitoring how full parking lots are at a store to predict earnings), that is fine.
Insider trading is about theft of information, not fairness.
If you develop the info yourself (say, monitoring how full parking lots are at a store to predict earnings), that is fine.
Insider trading is about theft of information, not fairness.
I wonder what would happen were those stores to say: “hey, those parking lots are ours and such they are private, as a result any information related to them is ours and hence private”?
if you develop it yourself, by definition you are doing it based on public information, so it does not apply.
> It does not matter how you got it
Well, it sort of does. In fact, that's almost all that matters.
Insider trading is all about obligations. If someone who had the obligation to keep the info secret gave it to you and then you went and traded on it, then yes, you're breaking the law.
But if, say, you figure it out by accidentally stumbling on a draft Splunk web page that has a Cisco copyright buried in the code, you don't have any obligation to not trade on that.
It's the same information but the only thing that's different is how you got it. The company and its shareholders are the ones who are harmed by insider trading, so if you're entrusted with the info and trade then you're basically breaching your duty to the company (or the chain of people who shared the info with you). But if the company fucks up and leaks the info then you don't have any obligation to not use it.
Well, it sort of does. In fact, that's almost all that matters.
Insider trading is all about obligations. If someone who had the obligation to keep the info secret gave it to you and then you went and traded on it, then yes, you're breaking the law.
But if, say, you figure it out by accidentally stumbling on a draft Splunk web page that has a Cisco copyright buried in the code, you don't have any obligation to not trade on that.
It's the same information but the only thing that's different is how you got it. The company and its shareholders are the ones who are harmed by insider trading, so if you're entrusted with the info and trade then you're basically breaching your duty to the company (or the chain of people who shared the info with you). But if the company fucks up and leaks the info then you don't have any obligation to not use it.
This obligation-centric view is in conflict with my understanding and the above investopedia link:
> Material nonpublic information is data relating to a company that has not been made public but could have an impact on its share price. It is against the law for holders of nonpublic material information to use the information to their advantage in trading stocks.
Edit: or would a leak on a webpage be considered “public”? I recall a podcast where they said that if you saw a company’s factory blow up while in an airplane, it would be illegal (insider trading) to trade on this information until the news was announced publicly.
> Material nonpublic information is data relating to a company that has not been made public but could have an impact on its share price. It is against the law for holders of nonpublic material information to use the information to their advantage in trading stocks.
Edit: or would a leak on a webpage be considered “public”? I recall a podcast where they said that if you saw a company’s factory blow up while in an airplane, it would be illegal (insider trading) to trade on this information until the news was announced publicly.
> if you saw a company’s factory blow up while in an airplane, it would be illegal (insider trading) to trade on this information until the news was announced publicly
How does this square with using satellite analysis to predict a company's retail volume?
https://newsroom.haas.berkeley.edu/how-hedge-funds-use-satel...
How does this square with using satellite analysis to predict a company's retail volume?
https://newsroom.haas.berkeley.edu/how-hedge-funds-use-satel...
> It is against the law for holders of nonpublic material information to use the information to their advantage in trading stocks.
The US and Europe differ on how exactly this should work.
In Europe, your view is correct. In the US, it's about obligation. You can trade on material non-public info if you discovered it on your own without doing anything illegal.
The US and Europe differ on how exactly this should work.
In Europe, your view is correct. In the US, it's about obligation. You can trade on material non-public info if you discovered it on your own without doing anything illegal.
[deleted]
The webpage leak would be considered public: anyone in the world can load up the page and access the information.
Unless you're a congressman
I've never heard of a publicly traded company that allows employees to buy/sell options on their stock, and I'm willing to bet that the fine print at most places includes companies you're soon to acquire/be acquired from.
> you just heard through the grapevine that it's happening
Is that "grapevine" public? If not, it is by definition material non-public information.
In general in finance if you think you've found some clever exploit in the system that you're surprised no one else is taking advantage of, it's a good idea to double and triple check that it is in fact a legal exploit. Especially if you stand to gain millions off of something that seems easy to do.
> you just heard through the grapevine that it's happening
Is that "grapevine" public? If not, it is by definition material non-public information.
In general in finance if you think you've found some clever exploit in the system that you're surprised no one else is taking advantage of, it's a good idea to double and triple check that it is in fact a legal exploit. Especially if you stand to gain millions off of something that seems easy to do.
How strong is the hunch?
This person spent $22,000 on buying the options. Unless you are a person who regularly trades this kind of money, the SEC will ask why you felt so confident in it that you made that bet.
If you're a regular "low level Splunk or Cisco employee" who honestly has no access to insider information and you honestly just have a "hunch," you're probably not making a bet at the level that the SEC cares about.
This person spent $22,000 on buying the options. Unless you are a person who regularly trades this kind of money, the SEC will ask why you felt so confident in it that you made that bet.
If you're a regular "low level Splunk or Cisco employee" who honestly has no access to insider information and you honestly just have a "hunch," you're probably not making a bet at the level that the SEC cares about.
IANAL, but probably comes down to whether you had access to material non public information. Ie, what gave you a hunch? If it's anything non public that could have also given others a hunch, had they known like you did, it's probably material non public information. There's no safe harbor for probabilistic insider trading.
>Is that considered insider trading?
Yes.
Yes.
Legally speaking then, it's best to never make trades on any company that you currently or have previously (because you could still have friends that work there) worked for?
If you are in the USA, rule 10b5-1 of the SEC [1] "allows insiders of publicly-traded corporations to set up a trading plan for selling stocks they own". Despite the description in the link, as I understand it you can also buy more stock as long as you announce it well in advance. It is explicitly meant to allow people who cannot avoid having non-public information about a stock to still trade in that stock. By forcing them to publicly announce well in advance what they intend to trade and when, the idea is that they then cannot do the short term high risk trading that you need to really profit from insider trading.
https://www.investopedia.com/terms/r/rule-10b5-1.asp
https://www.investopedia.com/terms/r/rule-10b5-1.asp
Have you never worked for a publicly traded company where part of your compensation is in RSUs?
You are only able to trade share's during specific windows of time typically 1 week after earnings are released.
Additionally virtually every company I've known has explicit policies stating that you cannot buy/sell any derivatives related to the company stock (which is a shame since buying put options is a legitimate way to insure your compensation).
Further more, even these rules are only this lax for non-executive or other high level employees. If you're higher up in the company you have much more access to non-public material information. The solution to this is usually to set up a 10b5-1 that automatically liquidates shares based on a schedule approved by the board.
In regards to the "previously" question. I wouldn't worry about legitimate trades, but if you are trading based on insider information and looking to gain a lot of money, then trading would, by definition, be "insider trading"
You are only able to trade share's during specific windows of time typically 1 week after earnings are released.
Additionally virtually every company I've known has explicit policies stating that you cannot buy/sell any derivatives related to the company stock (which is a shame since buying put options is a legitimate way to insure your compensation).
Further more, even these rules are only this lax for non-executive or other high level employees. If you're higher up in the company you have much more access to non-public material information. The solution to this is usually to set up a 10b5-1 that automatically liquidates shares based on a schedule approved by the board.
In regards to the "previously" question. I wouldn't worry about legitimate trades, but if you are trading based on insider information and looking to gain a lot of money, then trading would, by definition, be "insider trading"
>You are only able to trade share's during specific windows of time typically 1 week after earnings are released.
As a practical matter, you can set up a 10b5-1 to get around this restriction if all you want to do is regularly sell your RSUs when you get them or at certain fixed periods.
As a practical matter, you can set up a 10b5-1 to get around this restriction if all you want to do is regularly sell your RSUs when you get them or at certain fixed periods.
> You are only able to trade share's during specific windows of time typically 1 week after earnings are released.
Just having RSUs doesn't mean that you are trade restricted. That depends on your job function and you can confirm with HR (I had to). In addition, like you say, there are further restrictions if you are sufficiently high up.
Yeah, some companies have restrictions on derivatives, most have restrictions on shorting.
Just having RSUs doesn't mean that you are trade restricted. That depends on your job function and you can confirm with HR (I had to). In addition, like you say, there are further restrictions if you are sufficiently high up.
Yeah, some companies have restrictions on derivatives, most have restrictions on shorting.
If everyone looks at a trade like this as prima facie evidence of insider trading, why are these options even for sale?
It is like a casino, except if you win the jackpot you get arrested. Because we run our economy under the law that requires stock prices to be set by ignorant people.
It is like a casino, except if you win the jackpot you get arrested. Because we run our economy under the law that requires stock prices to be set by ignorant people.
The law requires not ignorant people, but equally ignorant people. This extremely well-timed trade is just an indication that the trader may not be equally as ignorant as the rest of us.
I think the suspicious thing is that these were bought right before the announcement of the acquisition. If they had bough the options at any other time and made money it would not be notable.
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What’s unusual is the volume of contracts purchased, not the contracts in and of themselves… without knowledge of a merger, these contracts had a 99.9% chance of expiring worthless the very next day, so buying $20k worth is rather suspicious…
Options reduce volatility, and provide for a more efficient economy/market
Do they keep the money if they get caught? If it’s the SEC, they directly can’t send someone to jail, only fine them? Is that right?
There is barely any open interest on any of the strikes. 127C specifically is only 420OI. 126C is 872OI, 125C is 778OI.
Is there any legit way in which whoever made this trade could have got a wind of a potential acquisition without relying on inside knowledge?
Knowing about the acquisition puts you in possession of material nonpublic information. It's unlawful to trade on the basis of such information whether you work at the company or not. Passing it along is 'tipping' and acting on it is still 'insider trading.'
My understanding is that having material nonpublic information is not—in itself—enough to make a trade illegal. As long as you're a true outsider, and didn't get that info using illegal means, you can trade on it.
Maybe this whale was tracking tail numbers, drove down to the executive airport, and saw that Cisco's chief M&A guy had a huge grin on his face as he stepped onto the plane.
(Okay, I doubt that highly, but it is a scenario)
Maybe this whale was tracking tail numbers, drove down to the executive airport, and saw that Cisco's chief M&A guy had a huge grin on his face as he stepped onto the plane.
(Okay, I doubt that highly, but it is a scenario)
I initially thought this wasn't the case, but did some research - so for posterity: if you overhear the information in a public setting you may be ok. It depends on whether you have a duty of trust, apparently, and personally I'd run it by a lawyer before firing up Robinhood. [1] Although (1) IANAL and (2) you may still be answering difficult questions if you structure your trades the way this individual did.
[1] https://money.com/insider-trading-examples/
[1] https://money.com/insider-trading-examples/
There is precedent that even if you are in possession of info that will eventually become public, which you then trade on, you can still be convicted of insider trading.
For example, a Printer for Business Week and a Stock Broker traded on pre-publication information and were convicted of insider trading.
https://corporateinsiderstrading.wordpress.com/2012/02/01/bu...
For example, a Printer for Business Week and a Stock Broker traded on pre-publication information and were convicted of insider trading.
https://corporateinsiderstrading.wordpress.com/2012/02/01/bu...
> for using stock information in “Business Week” magazine before it was distributed to the public
They traded on information that was non-public at the time of the trade. Why shouldn't that be treated exactly as trading on news of this merger before it was announced? (The merger was eventually going to be known to the public as well, right?)
They traded on information that was non-public at the time of the trade. Why shouldn't that be treated exactly as trading on news of this merger before it was announced? (The merger was eventually going to be known to the public as well, right?)
The printer has an obligation of trust. Someone overhearing your loud phone conversation in public does not.
Cisco and Splunk are both HQ'd in SF. If they were at the airport, it was coming back from Jackson hole or something.
The real trouble with 'maybe they were legit outsiders' is the options expired specifically today, which means you need to know _when the announcement_ is to profit.
The real trouble with 'maybe they were legit outsiders' is the options expired specifically today, which means you need to know _when the announcement_ is to profit.
I strongly suspect these trades are not legit. That said, the trader didn't necessarily KNOW that the deal would be announced today. Trading is a game of probabilities. It's possible that the trader used public information to figure out that Splunk could be acquired soon and there was a small but non-zero chance it would be announced today. In that case taking a $22k flyer on cheap options is a good risk-adjusted bet for a well-capitalized investor. (Although they'd have to factor in that this WILL result in a visit from the SEC, which is probably not fun even if you've done nothing wrong.)
Yeah, I don’t know, an investor sophisticated enough to predict that without insider information, I would have to hope that they would also be sophisticated enough to make the trade less blatantly obvious as a big bundle on 1 day expiration otm call options.
Fun fact: Cisco is actually headquartered in San Jose, but I believe that both companies have large engineering offices in both San Francisco and San Jose.
For those who don't know, they're both part of the same metro area (Bay Area) but they're 50 miles apart, anywhere from 1 to 2 hours apart depending on traffic.
For those who don't know, they're both part of the same metro area (Bay Area) but they're 50 miles apart, anywhere from 1 to 2 hours apart depending on traffic.
Still not taking a flight from SFO to SJC to seal a deal.
SPLK option expiration dates are weekly out to 6 weeks.
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There's a third element of insider trading: "in breach of a fiduciary duty or other relationship of trust and confidence"
0 - https://www.investor.gov/introduction-investing/investing-ba...
0 - https://www.investor.gov/introduction-investing/investing-ba...
I am far from an expert - but think this is essentially true - but does not universally imply you can't trade on the info.
Example: You watch the front door of an office building. From seeing who walks in, you ascertain with 99% probability that companies X and Y are working on some kind of big deal. If you're just a random person with no relationship to those companies, you can trade on this information.
(Not legal advice! Don't do this unless you are sure it is OK! Which I am not!)
Example: You watch the front door of an office building. From seeing who walks in, you ascertain with 99% probability that companies X and Y are working on some kind of big deal. If you're just a random person with no relationship to those companies, you can trade on this information.
(Not legal advice! Don't do this unless you are sure it is OK! Which I am not!)
Right, the SEC’s guidance[1] on this specifies that merely trading on MNPI alone is not enough:
> Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.
If you have no fiduciary duty or other relationship of trust and confidence, it’s not insider trading. So to my understanding, if you, say, overheard two execs chatting about this in an airport lounge you’d be free to trade on it.
Note: this only applies to the US! Different countries may define things differently.
[1]: https://www.investor.gov/introduction-investing/investing-ba...
> Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, on the basis of material, nonpublic information about the security.
If you have no fiduciary duty or other relationship of trust and confidence, it’s not insider trading. So to my understanding, if you, say, overheard two execs chatting about this in an airport lounge you’d be free to trade on it.
Note: this only applies to the US! Different countries may define things differently.
[1]: https://www.investor.gov/introduction-investing/investing-ba...
No, it’s essentially false. The crime is not trading on something the public doesn’t know. It’s breaching the trust for information given to you in confidence. It’s completely different despite looking similar on the outcome.
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No, your intuition is wrong here. Otherwise you couldn’t do private research. This definition varies and is true maybe in some European countries(???) but not the US.
Is it insider trading if the information is leaked publicly, like on Twitter?
>> Is there any legit way in which whoever made this trade could have got a wind of a potential acquisition without relying on inside knowledge?
Yes, people try to follow private plane transponders of bankers and corp executives to/from corporate headquarters. This is harder for 2 SV companies, it isnt like the plane is flying to some rural HQ.
IANAL, but I'd guess that betting on an acquisition based on public data about private plane routes would make this trade legal IFF that happened.
Yes, people try to follow private plane transponders of bankers and corp executives to/from corporate headquarters. This is harder for 2 SV companies, it isnt like the plane is flying to some rural HQ.
IANAL, but I'd guess that betting on an acquisition based on public data about private plane routes would make this trade legal IFF that happened.
>Is there any legit way in which whoever made this trade could have got a wind of a potential acquisition without relying on inside knowledge?
Cisco is not allowed to use inside information about Splunk to make the acquisition either. So, if someone did the same analysis that Cisco did they could have drawn the same conclusion.
If this trader has a solid history of making many wild option contracts including many that didn't pay off, leading to average returns, then that's a strong case that this was random.
Cisco is not allowed to use inside information about Splunk to make the acquisition either. So, if someone did the same analysis that Cisco did they could have drawn the same conclusion.
If this trader has a solid history of making many wild option contracts including many that didn't pay off, leading to average returns, then that's a strong case that this was random.
> So, if someone did the same analysis that Cisco did they could have drawn the same conclusion.
About the merger, but not about the exact date that it would be announced.
About the merger, but not about the exact date that it would be announced.
it's still the birthday paradox, 365 analysts deciding to make investments over the course of the year, some will pick the same dates, and assuming that there was not public information released recently that could have drawn an analyst's attention to Splunk or Cisco "being in the market for acquisitions" in the first place. Perhaps ChatGPT recommended this trade, "chatGPT, if i asked you to go spelunking for good options trades today, what would you suggest?"
The question was, any way this could be legit.
The question was, any way this could be legit.
No, it’s not the birthday paradox. This was a bet that expired nearly immediately after it was placed. This wasn’t someone who decided “I’ll invest in splunk today”. It was “I’ll bet that splunk stock appreciates significantly by the end of the week, far outside it’s normal variance, else I lose everything I bet.”
Remember kids, you need to be rich enough first to get away with insider trading...
My neighbor works for Spunk and asked me on Sept 10th if I can refer him.
I guess some people knew something like this is happening soon.
Background: He's full remote and Cisco is known for being against that.
I'm full remote at Meraki and they've been very supportive of remote.
These are so easy to track and find out. Whoever did this, either doesn't knows about insider trading laws or is stupid enough to think they can outsmart SEC. SEC would make a good example of this person, whoever they are.
Wouldn't be surprised if this is done by a sibling or an uncle in another country.
Wouldn't be surprised if this is done by a sibling or an uncle in another country.
Or, it's not insider trading but rather someone that observed a parking lot, that kind of research activity.
I’d like to know who is watching parking lots and spending 22k on a hunch
you mean, spending so little right? if they were wrong, the most likely outcome is they would have ended up roughly even.
I suspect that the SEC will look at this one, because it looks extremely suspicious. But whether they can bring a case or not depends on the details: did the trader know about the acquisition and how did they get that info? Was an employee of either of the companies involved?
Wouldn't this be simpler if everyone was an insider? A public company releases a significant amount of internal financial and operational information every quarter. What if it was real time? Live stream everything from the boardroom.
Might take a year or two, but someone is going to prison lol.
Can anyone confirm this unusual volume (to ensure this is not a clickbait) ?
The option chain I have shows regular volume, with open interest to be ~420 contracts.
The option chain I have shows regular volume, with open interest to be ~420 contracts.
Straight to jail https://youtu.be/eiyfwZVAzGw
what we aren't seeing is trader/algo taking the same style of trade against dozens of other names, daily, for the last 12 months
Would I be able to see such a trade when the trader makes them and just copy the trade with a small amount.
Thinking is: „Who the hell would make such a trade if he doesn’t have some information, let’s do the same“
Thinking is: „Who the hell would make such a trade if he doesn’t have some information, let’s do the same“
Who is selling these options?? Talk about picking up pennies in front of a steamroller...
The market makers which are basically big financial institutions make up the majority, but anyone could sell these if they wanted. Big money will sell options like these and then hedge the position by buying calls to stay neutral. Their goal is to profit off implied volatility which causes options to lose value over time until they eventually expire worthless.
Appears pretty obvious! Hard to believe they will be able to keep the profits.
Maybe it was just a member of Congress and thus no crime was committed
Insider trading or a time traveler who is new at this.
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Broke Rule #2 of Matt Levine's "Laws of Insider Trading": "Don’t do it by buying short-dated out-of-the-money call options on merger targets."
Broke Rule #1 too, it seems :).
Came to post just that. Great read!
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I know this isn't what happened, but what if one day I'm waiting for the bus and I over hear a guy talking on their phone about an imminent acquisition?
1. Would that still fall under insider trading even if the information was accidentally heard, and even if I wasn't 100% sure of its accuracy?
2. If I had no clear connection to the company how would it be proven that I was trading on insider information? Surely it's not enough just to say the trade was statistically unlikely, or is it?
1. Would that still fall under insider trading even if the information was accidentally heard, and even if I wasn't 100% sure of its accuracy?
2. If I had no clear connection to the company how would it be proven that I was trading on insider information? Surely it's not enough just to say the trade was statistically unlikely, or is it?
The SEC has recently been pursuing very expansive insider trading definitions, and they are occasionally losing, so it’s very hard to say.
But traditionally in the US insider trading is not about market fairness, it’s about not stealing from shareholders. So if you have no obligation to the company or it’s shareholders you aren’t an insider. The phrase is “breach of a fiduciary duty or other relationship of trust and confidence”.
But traditionally in the US insider trading is not about market fairness, it’s about not stealing from shareholders. So if you have no obligation to the company or it’s shareholders you aren’t an insider. The phrase is “breach of a fiduciary duty or other relationship of trust and confidence”.
This is not correct. If the tip came from an insider, it’s insider trading no matter who acts on it. See for example Martha Stewart who traded on an illegal tip from her stockbroker.
https://digitalcommons.liberty.edu/cgi/viewcontent.cgi?param...
most of the Stewart case was about her actions post the tip. If she’d had just said “my broker told me to sell” she’d likely be good to go (who knows). But she didn’t. She obscured and made it obvious with her actions that she was trying to steal from other shareholders (by acting on information she should not have).
most of the Stewart case was about her actions post the tip. If she’d had just said “my broker told me to sell” she’d likely be good to go (who knows). But she didn’t. She obscured and made it obvious with her actions that she was trying to steal from other shareholders (by acting on information she should not have).
Stewart was convicted and jailed for obstruction of justice and lying to investigators, not for insider trading.
To continue the “theft from shareholders” analogy, acting on a deliberate tip is fencing stolen goods
An intentional tip, right? Not an "overheard conversation".
Has to be. If you are monitoring the travel activity of cisco and splunk execs and happen to see them go to a fancy dinner after weeks of office meetings, there is no way that is insider trading. That's the same thing as overhearing a phone call in a cab.
But I'm pretty sure I read a case of a guy who traded on a future acquisition and was convicted on insider trading charges. He surreptitiously overheard it from his fiance, who worked for the company. Doesn't this guy not owe a company he doesn't work for a fiduciary duty....?
There's a sliding scale of accountability from "I did it", "My wife did it", "My fiance did it", "my significant other did it", "my neighbour did it" to "some person I don't know did it".
A fiance is still close enough that they are captured by lots of regulation, because collusion/cooperation between partners is so common.
A fiance is still close enough that they are captured by lots of regulation, because collusion/cooperation between partners is so common.
I feel like the SEC must have already taken into account the possibility of a "Strangers on a Train" situation where an insider tracks down an anonymous third party to commit the crime with the expectation of being paid back a percentage at some later date.
There are convictions for golf buddies swapping tips. In the perfect strangers situation, the tip receiver has no incentive to ever pay back the tipper. There's no legal recourse
Except the guy knows where you live and has already shown a willingness to break the law in ways where he thinks he won't be caught. If the top receiver suddenly finds himself dead there is nothing pointing back towards the original inside trader.
This is the stuff of tawdry crime thrillers, but it's certainly not so far out of the realm of possibility that the SEC can just ignore it.
This is the stuff of tawdry crime thrillers, but it's certainly not so far out of the realm of possibility that the SEC can just ignore it.
As a someone in scope of FINRA, yes actually. Your immediate nuclear family owes your company that duty and you have to grant your company's watchdog the ability to monitor your family member's investments for restricted trades.
See also: I am not allowed to use robinhood at all because their referral program can reward you with a restricted security. Nobody was grandfathered and every RH user at my firm was told to xfer out or find a new job. I also can't use any roboadvisor.
For us peons, independence is a serious matter. It's just the rich and powerful that get to flaunt it.
See also: I am not allowed to use robinhood at all because their referral program can reward you with a restricted security. Nobody was grandfathered and every RH user at my firm was told to xfer out or find a new job. I also can't use any roboadvisor.
For us peons, independence is a serious matter. It's just the rich and powerful that get to flaunt it.
The family has the obligation. When you're trading one of the questions is if you, or your family, has rank at public companies. That would make the link from the guy, to wife, to company.
Unless your wife is the leader of the house.
The Nancy Pelosi case is extremely interesting from a market manipulation point of view! It’s one of the strongest arguments for extreme restrictions on Congress trading. Trumps behavior in office is a similarly strong argument for extreme restrictions on Presidential trading.
But it’s not strictly about insider trading. Pelosi (or trump or Pelosis’ husband) are not traditionally insiders. The testimony they receive is by its nature public. That we’ve allowed lots of things that shouldn’t be secret doesn’t change that. That elected officials can be corrupted by their power isn’t an insider trading issue, it’s a corruption one.
But it’s not strictly about insider trading. Pelosi (or trump or Pelosis’ husband) are not traditionally insiders. The testimony they receive is by its nature public. That we’ve allowed lots of things that shouldn’t be secret doesn’t change that. That elected officials can be corrupted by their power isn’t an insider trading issue, it’s a corruption one.
Sure. But the issue is when they have insider information on how a vote is going to go, when the vote impacts stock prices. She has material information that the public does not.
But she's not an insider.
The common belief is that insider trading laws are about having data that the market doesn't know. In the US that's just not the basis for the law. In the US there is no expectation that everyone has the same information when trading. The expectation is that people who have a duty to the shareholders are not trading on any non public material information. If you don't have a duty to the shareholders, it doesn't matter how you trade.
Is that the appropriate standard to hold congress people to? I don't know, personally i think, no. But its not obvious that its incorrect from a legal point of view. What fiduciary duty does Nancy Pelosi have to some fund her husband owns? I'm good with a definition that says "once you become a congress person you have fiduciary duty to everyone" but thats not the law now.
The common belief is that insider trading laws are about having data that the market doesn't know. In the US that's just not the basis for the law. In the US there is no expectation that everyone has the same information when trading. The expectation is that people who have a duty to the shareholders are not trading on any non public material information. If you don't have a duty to the shareholders, it doesn't matter how you trade.
Is that the appropriate standard to hold congress people to? I don't know, personally i think, no. But its not obvious that its incorrect from a legal point of view. What fiduciary duty does Nancy Pelosi have to some fund her husband owns? I'm good with a definition that says "once you become a congress person you have fiduciary duty to everyone" but thats not the law now.
So if I’m a billionaire, I can say I’m going to buy a company, to build up its stock price, and then short it and publicly walk away? That’s fine because I don’t have a duty to that company’s shareholders? I mean sure, can only do it once, but that’s legal?
:shrug: it’s not insider trading (by historical norms) that doesn’t make it legal. There are other laws that you might be breaking.
Many financial laws consider spouses to be "identical" from the point of view of law. Since your wife would benefit from you acting insider knowledge she has, it applies.
https://www.sec.gov/litigation/litreleases/lr-24375
The case for those wondering.
The case for those wondering.
Sounds like he failed in his fiance duties.
is this not a breach of "other relationship of trust and confidence"?
Caveat that other jurisdictions do take a broader view (from memory, France is one that comes to mind where overhearing something confidential and trading on it is unlawful).
I believe the SEC went after capital one analysts who used information capital one has via credit card usages at stores to trade against companies not capital one. While one might say that the info that capital one had was proprietary (as they deffinitely use it for other things), its hard to view it ast hurting people one has a fiduciary duty to, but I believe they still won the conviction.
Were the analysts acting independently or on behalf of capital one? Because on its face it's capital one's information to trade with (other laws not withstanding)
yes they were acting on behalf of capital one, I'm just saying why its just not fidicuary duty to shareholders of traded company.
Yes! Very explicitly I mention the US because our insider trading laws are based on a different theory than European laws (for instance)
But.... if you're trading options you're not stealing from the shareholders, right? The person on the other side is also trading options, not a shareholder.
Yeah. This is a philosophical point that the law contemplates. Your option’s position is a theoretical position against the shareholders. I’m not convinced us insider trading laws are particularly logical or valuable (like most economists I think we shouldn’t have them) but you can usually back out the SEC position by figuring out how a shareholder was harmed.
> like most economists I think we shouldn’t have them
Isn't that basically just scamming? I can tell you I have a box full of gold, sell it to you, and then it's not. You think this is ok?
Isn't that basically just scamming? I can tell you I have a box full of gold, sell it to you, and then it's not. You think this is ok?
Just like any crime, they can charge you with it if they think they should. We live in a time when scant circumstantial evidence , like the fact you randomly traded outside your pattern with exceptional timing , can be enough for a DA to charge you.
In this case though you’d probably have a good defense to those charges. It’s possible they’d interview you and look into it more and see this plainly before bringing those charges. If they did though, even with a good defense, it’s going to be disruptive to your life and finances.
The fact they were speaking about it in public and you have no connection to them makes it plausible for you to think that what you heard was public information. The onus is on them to protect sensitive information like this so they could actually face some problems. It’s very much going to vary by all the people involved with the investigation and what they want to do with it.
In this case though you’d probably have a good defense to those charges. It’s possible they’d interview you and look into it more and see this plainly before bringing those charges. If they did though, even with a good defense, it’s going to be disruptive to your life and finances.
The fact they were speaking about it in public and you have no connection to them makes it plausible for you to think that what you heard was public information. The onus is on them to protect sensitive information like this so they could actually face some problems. It’s very much going to vary by all the people involved with the investigation and what they want to do with it.
It's still not public information (e.g. "Material Nonpublic Information"). You can't trade on it.
See 17 CFR § 240.10b5-1 "Trading “on the basis of” material nonpublic information in insider trading cases", particularly section (b) "Awareness of material nonpublic information."
https://www.law.cornell.edu/cfr/text/17/240.10b5-1
See 17 CFR § 240.10b5-1 "Trading “on the basis of” material nonpublic information in insider trading cases", particularly section (b) "Awareness of material nonpublic information."
https://www.law.cornell.edu/cfr/text/17/240.10b5-1
No this is not correct. If someone spreads a rumor and you don’t know that the information is from an authoritative source it’s not MNPI. It’s speculation.
If someone anonymously posts on Twitter that Splunk is going to get acquired by Cisco and you immediately buy options, and you don’t know who this Twitter account is, then it’s speculation. Also it’s no longer non-public information if someone posts it on Twitter.
If someone anonymously posts on Twitter that Splunk is going to get acquired by Cisco and you immediately buy options, and you don’t know who this Twitter account is, then it’s speculation. Also it’s no longer non-public information if someone posts it on Twitter.
"if someone posts it on Twitter."
Yes, if you trade on public information, then it's not material non public information.
Yes, if you trade on public information, then it's not material non public information.
It becomes public information when shared with the public, unintentionally or not. The specific kinds of relationships involved are a big deal. It’s fine to tell a waitress you closed a huge deal and she can even trade on it, but tell your wife and she can’t trade stocks on that information.
“insiders must be breaching a fiduciary duty owed to their corporation when they trade on or tip confidential corporate information. This stipulation almost always means that an insider cannot trade on such information and cannot tip others about it if the insider stands to gain by doing so. https://sloanreview.mit.edu/article/when-is-it-legal-to-trad...
In the case where an unrelated outsider overhears the information that’s public disclosure. And the information no longer needs to be treated by random people as non-public.
“insiders must be breaching a fiduciary duty owed to their corporation when they trade on or tip confidential corporate information. This stipulation almost always means that an insider cannot trade on such information and cannot tip others about it if the insider stands to gain by doing so. https://sloanreview.mit.edu/article/when-is-it-legal-to-trad...
In the case where an unrelated outsider overhears the information that’s public disclosure. And the information no longer needs to be treated by random people as non-public.
A guy speaking out loud at a bus stop isn’t public information?
The SEC has very specific rules and even specific form [1] they must file when companies release information like this.
[1] https://www.sec.gov/forms
[1] https://www.sec.gov/forms
So if the founder goes on TV and announces their merger then it’s nonpublic information until they file the form? Everyone who trades on that is insider trading? That can’t be right.
Right but - that means the company employee gets in trouble for making the information public (via announcing it in public at the bus stop) - not that I would get in trouble for hearing it and acting on it, right?
Those rules regulate the company, not random people at a bus stop.
Matt Levine covers this fairly extensively
I believe someone in Europe overheard info on a train and was successfully prosecuted. The US has not historically prosecuted trading on inside information that wasn't obtained illegally
So if you research that's fine. If you overhear something that might be fine (I don't think anyone has been seriously convicted yet but I could be wrong)
It can't be enough to say the trade was statistically unlikely because your independent research might legitimately let you make an unlikely trade. This particular trade was very unlikely though.
I believe someone in Europe overheard info on a train and was successfully prosecuted. The US has not historically prosecuted trading on inside information that wasn't obtained illegally
So if you research that's fine. If you overhear something that might be fine (I don't think anyone has been seriously convicted yet but I could be wrong)
It can't be enough to say the trade was statistically unlikely because your independent research might legitimately let you make an unlikely trade. This particular trade was very unlikely though.
I've thought about this type of question a fair bit. I'd even go one step further and ask what if you're in a position where you might hear about this stuff now and then (but not in a way that's easily provable, say you regularly take a train at the same time as an M&A lawyer that you shouldersurf) and you semi-regularly buy $1,0000ish (of variable amounts) in low-DTE options basically on no information - the whole purpose of it is you're buying 'insurance' where you're paying some% premium for obviously -EV trades.
You do this for months (hopefully without your M&A 'friend' swapping jobs or going WFH) before you shoulder surf that a publicly traded company is being acquired at some massive premium and spear the whale for low-DTE calls within 2S.D. of your normal range.
If you get investigated you can just say that you regularly take these kinds of punts for fun. You've got a record to prove it. You've got no contact with people in these positions, you can provide your entire social calendar and contact list and be probably many steps removed.
FWIW I keep all my money in some individual stocks and index funds. I just think this kind of hypothetical is a pretty fun situation to try to optimize for.
You do this for months (hopefully without your M&A 'friend' swapping jobs or going WFH) before you shoulder surf that a publicly traded company is being acquired at some massive premium and spear the whale for low-DTE calls within 2S.D. of your normal range.
If you get investigated you can just say that you regularly take these kinds of punts for fun. You've got a record to prove it. You've got no contact with people in these positions, you can provide your entire social calendar and contact list and be probably many steps removed.
FWIW I keep all my money in some individual stocks and index funds. I just think this kind of hypothetical is a pretty fun situation to try to optimize for.
The hardest part of this whole thing is finding someone who a) gets regular access to potential useful information, b) talks about it in public, which most of them probably don't, c) you can generally be close enough to overheard consistently but without being "that weirdo that always wants to sit behind me", all while being lucky enough to hear something at the right time.
If this guy had bought these calls last week (at same DTE) all he would have accomplished is donating $22k to some bank or hedge fund somewhere.
If this guy had bought these calls last week (at same DTE) all he would have accomplished is donating $22k to some bank or hedge fund somewhere.
In the most conservative definition, anything that communicates materially non-public information to you can potentially be a cause for insider trading.
It is fun to think about what the most minimal case could be. Ask the CEO what he thinks of revenue next quarter. If he smiles, starts to speak, then looks at the CFO and realizes he should stop, is that insider information? It probably is by some people's definition and he communicated no words.
It is fun to think about what the most minimal case could be. Ask the CEO what he thinks of revenue next quarter. If he smiles, starts to speak, then looks at the CFO and realizes he should stop, is that insider information? It probably is by some people's definition and he communicated no words.
No this would not be insider trading. You have no idea if these people even work for Splunk. And they could have just been speculating.
The SEC could still sue you and turn your life upside down by investigating every aspect of your life to try to find the connection that gave you that information, but if they can’t come up with the proof then eventually you would be fine.
The SEC could still sue you and turn your life upside down by investigating every aspect of your life to try to find the connection that gave you that information, but if they can’t come up with the proof then eventually you would be fine.
How many lawyer meetings with the SEC are you willing to sit through for $10M (5 after taxes)?
If I've got $5M to spend on attorneys, quite a few.
More than one?
Probably about ten years worth.
I'm sure it technically counts. If this was allowed imagine how easy it would be to get out of an insider trading accusation.
> Oh, but I didn't pay employees for insider information. I merely overheard it at the bus stop!
Granted, if this really is how someone learns of an acquisition it would be unlikely to get proven in court, and unlikely you'd even get accused as someone with no ties to the company.
That all being said, the clear message from our government is that insider trading is okay. Our politicians do it every week. So don't feel bad about it if you do get a lucky tip.
> Oh, but I didn't pay employees for insider information. I merely overheard it at the bus stop!
Granted, if this really is how someone learns of an acquisition it would be unlikely to get proven in court, and unlikely you'd even get accused as someone with no ties to the company.
That all being said, the clear message from our government is that insider trading is okay. Our politicians do it every week. So don't feel bad about it if you do get a lucky tip.
Imagine how easy it would be to accuse lucky traders of insider trading.
This exact scenario is well discussed here: https://www.bloomberg.com/opinion/articles/2019-03-29/deals-...
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Remember the case of coinbase PM who had his brother in India buy crypto before coinbase added them to their platform for trading? It was insider trading because insider gave the tip. PM's brother had no connection to the company directly.
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Doesn't matter. That is still inside information and you can't trade it. Otherwise you'll end up just like this guy [0] and all the others who thought they could get away with it. Doesn't matter who.
The amount of HNers attempting to defend illegal trades like this is mind-boggling. Those in Congress should also be investigated over their suspiciously timed trades and as long as they are working in Congress, they should not be doing such trading at all.
There are no excuses for it.
[0] https://www.nbcnews.com/politics/politics-news/ex-lawmaker-c...
The amount of HNers attempting to defend illegal trades like this is mind-boggling. Those in Congress should also be investigated over their suspiciously timed trades and as long as they are working in Congress, they should not be doing such trading at all.
There are no excuses for it.
[0] https://www.nbcnews.com/politics/politics-news/ex-lawmaker-c...
Let's assume this turns out to be insider trading. Can someone shed a little insight on why this is worthy of a prison sentence?
To me, even if they used information they had and we didn't, I don't see who the "victim" of this crime would be. It truly sounds like a "but it's unfair" argument and I'd really like to know why I'm wrong here.
Thanks in advance
To me, even if they used information they had and we didn't, I don't see who the "victim" of this crime would be. It truly sounds like a "but it's unfair" argument and I'd really like to know why I'm wrong here.
Thanks in advance
Fair markets are efficient markets. Regulators try to keep the markets fair and efficient. If a market is unfair, participants are scared away, which leads to more inefficiency and potentially a collapse of the market.
you are muddying two concepts. It is important that people have the perception that markets are fair, and actual fairness should be considered an important part of that.
but in terms of market efficiency, trading on inside information actually does move the market in the correct direction, toward its new market clearing price, so trading on inside information generally makes the market more efficient: if you are trading based on statistical properties of the market, "a diversified portfolio across market sectors", having the prices be corrected will give you a more balanced portfolio.
I'm not an expert on the intricacies of the regulations around acquisitions, but Cisco, big company, deciding to acquire Splunk, smaller company, is a very material fact about Splunk. Acquirers are only allowed to acquire a certain number of shares before making a public tender offer, because shareholders are entitled to know this information.
answering GPs question "who is harmed", well if you collect profits on one big trade, they came from somewhere, they came from people who traded with you without having the information you have, a trade which you enticed by making your lowball offer which only appeared like a good offer because they were in the dark. If such trades were legal, then insiders would corner the entire market for shares before any announcement was ever made.
but in terms of market efficiency, trading on inside information actually does move the market in the correct direction, toward its new market clearing price, so trading on inside information generally makes the market more efficient: if you are trading based on statistical properties of the market, "a diversified portfolio across market sectors", having the prices be corrected will give you a more balanced portfolio.
I'm not an expert on the intricacies of the regulations around acquisitions, but Cisco, big company, deciding to acquire Splunk, smaller company, is a very material fact about Splunk. Acquirers are only allowed to acquire a certain number of shares before making a public tender offer, because shareholders are entitled to know this information.
answering GPs question "who is harmed", well if you collect profits on one big trade, they came from somewhere, they came from people who traded with you without having the information you have, a trade which you enticed by making your lowball offer which only appeared like a good offer because they were in the dark. If such trades were legal, then insiders would corner the entire market for shares before any announcement was ever made.
Insider trading also makes markets more efficient. So I don’t think your argument is as strong as you think.
I also think it’s weird we don’t apply this consistently. I can buy many assets with “non public information”, just not those the SEC regulates. So it’s not really about markets at all, but specifically about fairness for shareholders (or something by like that?)
I also think it’s weird we don’t apply this consistently. I can buy many assets with “non public information”, just not those the SEC regulates. So it’s not really about markets at all, but specifically about fairness for shareholders (or something by like that?)
It is by definition not efficient because some participants have more information available to them than others.
the "secret" about the pending acquisition is what makes the market inefficient. Trading based on the secret information does integrate that asymmetric information into the price creating better price efficiency.
If you were the other side of that trade then you’re the victim. For everyone else it erodes trust in the market
It all depends on your values. A lot of good things happen by trying to reduce unfairness, where possible. Public schools allow anyone to be able to get an education, not just those with money. Health care lets people get the help they need if they are unlucky enough to get a devastating disease.
So the "victim" here is society. People can use their connections to get an advantage over others. They can turn that money and those connections into an even larger advantage. Then their relatives can inherit that and continue that. And if the system is blatantly rigged, why would normal investors want to be involved in the market?
Again, it depends on your values.
So the "victim" here is society. People can use their connections to get an advantage over others. They can turn that money and those connections into an even larger advantage. Then their relatives can inherit that and continue that. And if the system is blatantly rigged, why would normal investors want to be involved in the market?
Again, it depends on your values.
Someone had to sell the that call option . . .
Whoever sold it wouldn't have sold it if they knew a merger would be announced the very next day (or wouldn't have sold it at that price, to be more accurate).
Whoever sold it wouldn't have sold it if they knew a merger would be announced the very next day (or wouldn't have sold it at that price, to be more accurate).
The person(s) that wrote the options is the victim(s). They lost ~$10m because they lacked knowledge that the insider had.
Just because the harm is socialized - spread across a large population - does not mean the harm is diminished or that the crime is victimless.
In some ways a crime like this is worse for not harming any particular person directly. First, because people often convince themselves that not having a clear victim means it's victimless and therefore okay, which is where your line of thought seems to be going. Second, because the lack of a clear victim means such crimes can go relatively unnoticed, unmitigated, and under-punished.
IMO, white collar crimes (and not just the explicitly illegal ones) are an insidious disease on society. The indirectness of the harm serves as a kind of camouflage against peoples moral judgement, but that's a failure of judgement. It's like falling for that trick that kids do where they spread their food all over their plate so it looks like they ate more of it.
In some ways a crime like this is worse for not harming any particular person directly. First, because people often convince themselves that not having a clear victim means it's victimless and therefore okay, which is where your line of thought seems to be going. Second, because the lack of a clear victim means such crimes can go relatively unnoticed, unmitigated, and under-punished.
IMO, white collar crimes (and not just the explicitly illegal ones) are an insidious disease on society. The indirectness of the harm serves as a kind of camouflage against peoples moral judgement, but that's a failure of judgement. It's like falling for that trick that kids do where they spread their food all over their plate so it looks like they ate more of it.
I can't tell you why any non-violent crime warrants a custodial sentence. It seems like civil penalties really ought to be enough deterrent and a much better recompense to society.
Who is the victim?
The person who bought the stock you knew was worthless or sold you the stock you knew was gold.
Why is insider trading a crime?
It's an unmanageable market advantage, if we didn't disallow it then people wouldn't play. The people who make the rules benefit from people playing.
Who is the victim?
The person who bought the stock you knew was worthless or sold you the stock you knew was gold.
Why is insider trading a crime?
It's an unmanageable market advantage, if we didn't disallow it then people wouldn't play. The people who make the rules benefit from people playing.
It pretty much undermines the fairness of the entire market. If insider trading wasn’t a crime, the single goal of every investor would not be to find investable companies but to find insider information.
The stock market would cease to be an effective tool for raising capital.
It would be more akin to the crypto market where there are no such rules about insider trading and everything is pumped and dumped via influencers and degens acting on insider tips.
The stock market would cease to be an effective tool for raising capital.
It would be more akin to the crypto market where there are no such rules about insider trading and everything is pumped and dumped via influencers and degens acting on insider tips.
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Options are really zero sum, every dollar you make is necessarily a direct loss for somebody else.
>I don't see who the "victim" of this crime would be
The person that sold the options. They were offering cheap insurance for a very unlikely event.
The person that sold the options. They were offering cheap insurance for a very unlikely event.
Whoever sold them those call options, at the very least.
Think about what the US economy would look like if anyone could do this any time they wanted to.
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Not defending anyone, just saying.
- If I have $1000 I might choose to spend $2 for a gambling. - If the trader have $10M already, it might be reasonable for him/her to spend $20k gambling on some rumors.
This guy could be someone who is already rich.
- If I have $1000 I might choose to spend $2 for a gambling. - If the trader have $10M already, it might be reasonable for him/her to spend $20k gambling on some rumors.
This guy could be someone who is already rich.
There is a 0% chance this is someone gambling. This is a 1000000 sigma event.
many people gamble in many options continuously all the time. did trades like this occur in the market for Splunk every day? did this trade significantly affect the price or volume in Splunk options? If it's part of a very common pattern of random trading, then the unusual thing is the acquisition, and not the trade.
And a suspicious trade itself is not enough evidence, there needs to be evidence of an inside information conduit to make the case.
I'm not take sides on the suspiciousness of the trade, I'm pointing out what the language of the evidence should look like to raise suspicion.
And a suspicious trade itself is not enough evidence, there needs to be evidence of an inside information conduit to make the case.
I'm not take sides on the suspiciousness of the trade, I'm pointing out what the language of the evidence should look like to raise suspicion.
Really? 0%? That seems unjustifiably confident.