In today’s Barron’s magazine there is an article titled “Keeping One Step Ahead of the News“. The article summarizes an academic study by Nitesh Sinha (University of Illinois at Chicago). Barron’s tagline was:
A provocative new academic study suggests the government should scrutinize options trading for hints of insider trading. Volume seems to arrive before the news does.
The study took researched how the options market behave before “surprise” news came out. They took two incidents involving Baxter International and Bank of America and showed that option volume increased by a factor of more than 500 prior to the news coming out, which was obviously sign of something interesting occurring (if it can be replicated on a larger scale). Generally the SEC seems to go after stock trading rather than the options market for insider trading, but per the authors there are a lot more ways to trade on information in the options market and it is also easier to “short” bad news (just buy a put) when for the cash market you actually need to “short” the stock which is more complex.
It is important to realize that these sorts of researchers actually DO find major items that the SEC misses from time to time; the “options backdating” scandal (where executives chose the most advantageous day where the price was lowest as the date of issuance for their options) was broken by researchers and not the SEC itself. It will be interesting to see if this study can be extended or similar ones launched and how far these investigations go. Unlike the options dating scandal where the companies themselves were charged in this case if you see an strange event like a bump in trading they would have a lot of work to do in order to determine who profited and why and whether or not it was based on insider information.