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New insider trading case could alter buy-side research

Posted on November 22, 2010 at 1:10 pm

Unless you’ve been living in a cave last week (i hear it’s nice there this time of year), you’ve probably seen/heard/felt the aftereffects of the WSJ article U.S. in Vast Insider Trading Probe.

What’s going on

The short of it is:

  • the U.S. suspects the existence of multiple insider trading rings
  • the size of the impact of this net would vast eclipse previous insider trading networks
  • ensnared are consultants, investment bankers, hedge-fund and mutual-fund traders, and analysts
  • holy mackerel, batman

Interesting for readers of Tradestreaming and my book is the focus on expert networks. As per the WSJ

One focus of the criminal investigation is examining whether nonpublic information was passed along by independent analysts and consultants who work for companies that provide “expert network” services to hedge funds and mutual funds. These companies set up meetings and calls with current and former managers from hundreds of companies for traders seeking an investing edge.

These expert networks are de facto for most large investment funds.  As I wrote, expert networks like Gerson Lehrman provide unique research experiences, connecting fund analyst with industry experts for one-off interviews.

Not all bad

Unlike traditional sell-side research that is distributed to many investors and loses its value with greater distribution, expert networks provide extremely valuable interactions.  My book includes an interview with a senior GLG executive.  Much of our time spent together was spent dissecting the compliance engine the leading network had put together and I believe this was as much for PR purposes as much as it was for legal purposes.

It is clear that expert networks have been cited numerous times in the past few years as potentially being involved in facilitating investors’ access to material nonpublic information.  However, we are convinced that the financial markets are better off using “best of breed” expert networks than without them — Integrity Research

Other insider trading rings busted recently (like Galleon) were their own creations.  I have to agree with Integrity Research‘s opinion — this wasn’t by chance.  If Galleon’s vast web of insider information had existed on GLG’s platform, there would have been a clear audit trail of who was involved and to what level.  That didn’t occur — instead, by using individual contacts, Galleon was able to obfuscate its activities for years.

That wouldn’t have happened using a professional expert network and markets are better off by having these.  That said, it’s clear why GLG isn’t able to go public and we’re probably looking at increased regulation of these platforms (which would push more investors to skirt their use).

Heavier hand add more carrying costs

What might happen, regardless of the outcome of this particular probe, is

  • increased scrutiny into the investment research space
  • some type of oversight/regulation of expert networks
  • more distrust of Wall Street by people on Main Street
  • employers continuing to crack down on employee participation in expert networks
  • formation of ad hoc expert networks (LinkedIn + phone)
  • prices going up on expert networks because of increased oversight

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  • Tradestream Radio #2: hedge fund replication, insider trading, more

    Posted on December 1, 2010 at 12:20 pm UTC

    This week’s episode of Tradestreaming Radio is up and ready for listen. Let me know what you think and if you have ideas for future shows. You can listen below, find the transcript below or download directly to you iPod/iPhone via iTunes — search for Tradestream or go here.

    This episode includes

    • the huge insider trading probe into many of the largest US hedge funds
    • research networks (expert networks) and how they play a role in the investing process
    • interview with hedge fund replication research provider, AlphaClone CEO and founder
    • Ivory Tower Report: Smart investors think like economists (is that a good thing?)
    • Trend Watch: Seeking Alpha continues to grow and introduces its own investing app store

    Transcript Continue Reading »

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  • Insider Trading Dashboard: Everything you need to know

    Posted on November 28, 2010 at 12:56 pm UTC

    With the daily news of hedge funds being raided and expert networks being investigated, I wanted to put together a resource sheet for those looking to delve a bit further into the insider trading game.

    Research

    Decoding Insider Trading (Cohen): This new paper looks at a methodology to isolate insider traders acting on good information from noisy trades.  By looking at individual trades — versus looking at all insider activity — investors can mimic better-performing trades, boosting performance of insider trading strategies.

    Law and Economics of Insider Trading: A Comprehesive Primer (Bainbridge) 84 pages of insider trading awesomeness.  This 2001 paper deals with everything from the origins of current laws prohibiting insider trading to defining an insider to making a case for and against regulating insider trading. For a smaller, more concise paper on insider trading, see Bainbridge’s Insider Trading: An Overview

    Stock Market Anomalies: What can we learn from repurchases and insider trading (Core, Guay, Richardson, Verdi)

    How Informative are Analyst Recommendations and Insider Trading (Hsieh, Ng, and Wang) Evidence points to insider trading and analyst recommendations giving conflicting signals.  This paper documents that and provides theory why this may be the case.

    What Insiders Know about Future Earnings and How They Use It: Evidence from Insider Trades (Ke, Huddart, Petroni) Insiders do trade on this stuff up to 2 years before public release.

    Do Insider Trades Reflect Superior Knowledge About Future Cash Flow Realizations (Piotroski, Roulstone) Short answer: yes.

    Insider Trade Disclosure, Market Efficiency, and Liquidity (Buffa): Policy implications after finding that informational efficiency and liquidity are lower in more transparent markets

    Institutional Investors and Insider Trading Profitability (Markarian, Bricker) Insider profits are inversely related to presence of institutional ownership.  Hedge funds/mutual funds may provide monitoring effect.

    MSM (Mainstream Media) on Insider Trading

    WSJ on Insider Trading (sub. req’d)

    Bloomberg.com: Insider Trading

    Google fastflip on Insider Trading

    Tradestreaming on Insider Trading

    Dealbreaker’s Insider Trading Fest(ivus)

    NYT on Insider Trading

    Dealbook on Insider Trading

    Books on Insider Trading Strategies

    Investment Intelligence from Insider Trading: If this book is the bible of insider trading strategies and research, its author, Professor Seyhun is Moses.  Great research into strategies for following insiders.

    Profit from Legal Insider Trading: Invest Today on Tomorrow’s News

    The Vital Few vs. the Trivial Many : Invest with the Insiders, Not the Masses

    Videos on Insider Trading

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  • Strapped for Cash, Do’s and Don’ts (Financial Literacy via Music)

    Posted on November 28, 2010 at 11:31 am UTC

    I find that I use music a lot to explain issues to my teenage children.  Not surprisingly, many tough issues are dealt with via music, rhythm, and lyrics.  Pop music has become a form of modern-day poetry for the masses — much like epic poetry for the Greeks.  While my kids flinch at memorizing anything for school, they have an ENORMUNGOUS repository of songs/lyrics resting under the hood.

    Fountains of Wayne: Strapped for Cash

    Lessons in debt management

    Fountains of Wayne (Wikipedia) has “Strapped for Cash”, a fun yet serious song about debt and the vicious cycle that can envelop a person, company or country.  Debt can take its toll on us, not only monetarily but also psychosomatically.  Feeling trapped, many investors turn to short-sighted activities that only increase the velocity of the debt cycle.

    Well it was Saturday night, I was sitting in the kitchen
    Checking out the women on Spanish television
    Got a call from Paul who was just let out of prison
    He said hey listen, there’s something I’m missing
    I said I’m on it, honest, it’s on its way
    You’re gonna get your money in a couple of days, okay?
    I’m just a little strapped for cash
    Take it easy baby, cut me some slack, I said (most of the time, creditors are willing to negotiate terms of debt and would rather see some return on their loans than a total zero.  Don’t be afraid to negotiate)

    I’m just a little strapped for cash
    Very temporary, don’t you worry ’bout that
    Strapped for cash

    So I headed out west to invest in the races (‘invest’ in races?  C’mon, this is a very dangerous strategy that involved betting/trading/investing in something else in order to win back money lost — bad idea and compounds the problem.)
    All the goddamn horses kept falling on their faces (investing requires patience, time horizon and a way to better your changes via value investing, dividends, etc.)
    Didn’t fare much better at the Taj Mahal
    Chalk it up to bad luck and free alcohol
    And now I’m laying low, you know I’m trying to stall (stalling just increases the anxiety — better to be proactive about debt and meet it head-on. Try negotiating and finding other ways to bring in some money via part-time jobs, hobbies, etc.)
    But I don’t know how much longer I can dodge the calls
    Sayin’

    I’m just a little strapped for cash
    Don’t you know I wouldn’t do you like that
    I’m just a little strapped for cash
    Give me a minute you know you’ll get it back
    C’mon

    Strapped for cash
    Strapped for cash

    Six bodybuilders pulled up in a Pinto
    Next thing I know they’re coming through the window (at some point, debt has to catch up to a person, company or society and payback can be harsh)
    Hate to keep you waiting, I know times are hard
    Now would you prefer a Visa or a MasterCard (quick word of advice: don’t use credit cards to pay off debt.  It’s extremely onerous debt and works to increase the velocity of the debt cycle — better to pay off credit cards first)

    Because I’m just a little strapped for cash
    Take a seat, I’ll be back in a flash, I said
    I’m just a little strapped for cash
    No need to have a heart attack (debt and the struggle to free oneself from it has definite effects on our health and psychological well-being)
    Bop shoo wop, bop bop shoo wop

    (lyrics)

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  • Breaking: Yahoo Finance Message Boards raided by FBI

    Posted on November 24, 2010 at 1:55 pm UTC

    In an incredible twist, the FBI and DOJ have raided the Yahoo Message Boards today as part of an expanding investigation into insider trading.  According to most recent reports, the FBI is investigating numerous players in the investment field (including 6 hedge funds) in what pundits are calling Insider Trading Fest(ivus)

    Posing as bigdaddywantmoney123 and insiderhoneypot, two detectives have been monitoring suspicious activity for the past 7-11 years on the industry’s most active site to share useless, inane, political opinions.

    After serving a warrant to…um…eh…(WTF?? Who’s in charge over there at Yahoo?!), the FBI sent a team of forensic detectives to do their thing on the Yahoo Finance Message Boards on a set of servers located in Sunnyvale, CA.

    The smoking guns

    $BIDU: On the Baidu ($BIDU) message board, asiantradermakingseriousyuan said that his cousin’s brother’s wife who lives in Beijing knows BIDU’s CEO’s brother’s nanny and she says the company is on fire. Clearly, impactful nonpublic information.  Google, here we come!

    $AAPL: Over on the media device juggernaut’s boards, user macforlifebaby said that he’s got an in with a janitor who cleans Steve Job’s dentist’s office and reportedly, the Apple Computer CEO had a least three teeth whitenings in the past 3 years.  Heady stuff — what you trying to hide, Steve, eh??

    $AMZN: This one’s really good. You know the hot Kindle book reader device sold by Amazon.com.  Well, supposedly, someone’s posting on the message boards who works at UPS in Seattle and he estimated that he’s picking up more boxes this year than ever before at the retailing giant.  God, that’s good info!

    $PCLN: This one seems a bit far-fetched but illustrates how individual investors are not playing on a level playing field when it comes to investing.  So, you know how you can bid on hotel rooms on Priceline.com?  Well the stock is one of the best performers over the past 12 months and IwanttohaveWilliamShatnersbaby says that he (she?) noticed that hotels in New York city are going for less than they were 3 months ago.  Short it baby!!

    In all seriousness, the FBI is taking these allegations seriously and says its aim is to prevent leakage of potentially tradeable info onto the message boards.  The FBI has suggested the Internet to be turned off periodically and power cut to those homes suspected of aiding and abetting these criminals.

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  • Seeking Alpha ramping up

    Posted on November 23, 2010 at 10:09 pm UTC

    Financial opinion aggregator Seeing Alpha is ramping up its traffic and overall site activity according to a blog post by the company’s founder and CEO, David Jackson.

    Jackson’s November Update included a variety of data points, all accentuating the site’s growth:

    • Seeking Alpha’s new App Store has scored over 20k installs
    • new section launched targeting income investing
    • launch of a mobile site
    • site traffic hits all-time high

    According to SA’s Jackson

    During the week starting the 7th of November, Seeking Alpha had the strongest traffic in the history of our site — 7% more traffic that the second strongest week in the history of the site and 40% more than we saw in the same week in 2009

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About Tradestreaming

Tradestreaming is a community of investors learning directly from experts. I’m Zack Miller, investor, entrepreneur, and founder of Tradestreaming.com and I literally wrote the book on how to invest in the age of Facebook and Twitter. Tradestreaming is the resource I’ve created to help me become a better investor.  I believe it will help you … Continue Reading