Stock Predictive Analysis: Insider Trading

My wife Kayla inspired this post with a question she posed to me earlier this week.  She asked me if there was a way to determine when a stock’s price will go down.  If one truly knew the direction of an individual stock every time they moved they would probably sell the information for a lot of money.  This is one in a series of multiple posts attempting to answer the question, “can one know the direction of a stock’s price movement?”. The short answer is yes, however most of the people that can truly predict the direction of a company’s share price cannot actively trade on this information – its called insider trading.  To think that such individuals don’t do so is naive, whether they get caught is another question.  However, there are some indicators that identify where a company’s stock will go.  The biggest problem is that these are much easier to identify after the fact.  This post and others on predictive analysis will talk to some of the red flag indications that a stock price may fall.

Insider trading tells everybody at precisely the wrong time that everything is rigged – Preet Bharara

Just a fair warning, insider trading is the dark side of the stock market.  If you cannot handle a cynical perspective on the market, stop reading.  My perspective is very cynical in this area.  I personally believe that it is difficult to think that in a high performance environment to achieve better than average results the temptation to use insider information just to keep one’s job is tremendous.

An interactive Bloomberg article from 2016 talks of the largest insider trading ring bust in US history.  The SEC convicted 93 individuals total as part of this crime wave.  One can argue that this is a great job by the SEC.  However, the alternative perspective could be to think that they only have money and time to prosecute the most egregious deals-just like sports authorities only prosecute Olympians or professionals because the news value of the action has impact to show that the organization is valid.

The average rogue trade according to some professors and New York University was worth about $1.6 Million.  Quantifying this information, it was simply a study not the holy grail double blind study that shows the best statistically significant information (who is going to say, “I am an insider trader and would be more than happy to join your study for science…”).  However, they did consider over 16 years of data analyzing thousands of merger and acquisition activity as part of the study and claimed that about one in four mergers included insider trading information.

The Point

In conclusion, it is possible to get actionable information about the direction of individual stock prices this is why insider trading exists.  The individuals that participate in such activity probably can make significant gains from such activity.  However, insider trading is illegal and the SEC will prosecute anyone that they find worthy of prosecution.

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