"Actions speak louder than words"
- Old British Idiom
When Messr. Matthew Miller, a Bloomberg-Tv news anchor, was discussing the acquisition of 3Com (by Hewlett Packard) with his co-anchor (on Bloomberg-Tv's 11th of November 2009 edition of The Final Word), he asserted that the observed irregularities in the market activity, prior to the announcement of the said acquisition, reflected that insiders may have illegally exploited their informational advantage to reap small financial benefits from the transaction.
A few hours after he made this assertion, a blog post at Zero Hedge unequivocally corroborated his thesis.
For your information, the said Zero Hedge blog post states that:
However, I am of the belief that people are rushing to conclusions prematurely; what usually appears at first sight to be insider trading, sometimes isn't insider trading.
Sometimes, information can be extracted from 'insiders' without their knowledge, using methods that are not really illegal or legal per se.
In scenarios like these, the trading activity that ensues such information harvesting activities has economic consequences, that like insider trading, undermine investor confidence in the fairness and integrity of the securities markets.
I'll cite a brief hypothetical example:
A few hours after he made this assertion, a blog post at Zero Hedge unequivocally corroborated his thesis.
For your information, the said Zero Hedge blog post states that:
- 3Com's acquisition by Hewlett Packard for $7.90 per share after the close today came as a surprise to many, but not all. Because someone bought three times the open interest in November $5 calls and fifteen times the open interest of the December calls. In summary: 3,961 November $5 calls were purchased today (964 open interest) for $0.65, as were 3,269 December $5 Calls (210 open interest) for $0.85. The profit, assuming the insider action was by one entity, is about $870,000 on the Novembers and $650,000 on the December strikes, for a not too shabby illegal daily P&L of $1.5 million
However, I am of the belief that people are rushing to conclusions prematurely; what usually appears at first sight to be insider trading, sometimes isn't insider trading.
Sometimes, information can be extracted from 'insiders' without their knowledge, using methods that are not really illegal or legal per se.
In scenarios like these, the trading activity that ensues such information harvesting activities has economic consequences, that like insider trading, undermine investor confidence in the fairness and integrity of the securities markets.
I'll cite a brief hypothetical example:
As you may already know, in every M&A transaction there is an investment bank that helps to structure the transaction, and a law-firm that lends its legal expertise to the parties involved in the integration process.
Most of the transactions that yield tremendous economic value are usually expedited by law firms and investment banks that dominate the upper echelons of M&A league tables.
Most of the transactions that yield tremendous economic value are usually expedited by law firms and investment banks that dominate the upper echelons of M&A league tables.
Generally, Mergers and Acquisitions transactions are usually the culmination of months to a year of complex negotiations conducted in several meetings between the parties involved in the transaction. In most firms, senior partners and vice presidents in the M&A departments of investment banks are involved in the entire transaction.
Therefore, to get information on possible transactions before they get announced in the media, a hedge fund can engage several private investigators to track the movements of top M&A bankers and lawyers on a regular basis, and to just take note of whom they meet, the people in their entourages during the meetings, how long the meetings last, where the meetings are held, how often the meetings are conducted and e.t.c. .
The raw information can then be relayed to the hedge fund for processing, and basically the hedgie will tally-up the information and roughly categorize it as follows:
If you ask anyone who has ever been confronted with pictorial evidence of his infidelity by his wife, he will acknowledge that information can be gathered stealthy by private investigators. Thus, this means that most of the 'investigations', in the hypothetical scenario above, can be conducted without the subjects ever noticing that they are being tracked.
Hence, from the summary above, the hedge fund manager can ascertain, or infer, that the company represented by CEO C is in the process of acquiring the company managed by CEO D, and can then profit by shorting the shares of the company managed by CEO C, and going long on the stock of CEO D's company.
To obfuscate 'the trail', the hedge funds may use a combination of opaque OTC derivatives - to conceal the short portion of the trades; and, they may execute the long portion of the trade using low-latency trading systems that are so fast, that no one (from the outside) can tell that the transaction is transpiring.
The scenario above may seem like a fanciful suggestion, but ask yourself this question: why do most hedge funds have armies of private investigators on their 'unofficial' payrolls?
The raw information can then be relayed to the hedge fund for processing, and basically the hedgie will tally-up the information and roughly categorize it as follows:
- Banker A, from such and such a firm met CEOs C and D in the presence of their CFOs and legal advisers, 4 times a week for the last 6 months, at 11am 90% of the time, at locations X, Y and Z. The meetings lasted an average of 4hrs 90% of the time. There is an M&A team from banker A's camp that is spending a total of 12hrs of week at the company that's managed by CEO D, and their visits usually coincide with those from the CFO and legal advisor of the company managed by CEO C. The company managed by CEO C is financially strong, whereas the company that is managed by CEO D is financially weak. Both companies operate in industries or sub-sectors that are mutually dependent, or symbiotic.
If you ask anyone who has ever been confronted with pictorial evidence of his infidelity by his wife, he will acknowledge that information can be gathered stealthy by private investigators. Thus, this means that most of the 'investigations', in the hypothetical scenario above, can be conducted without the subjects ever noticing that they are being tracked.
Hence, from the summary above, the hedge fund manager can ascertain, or infer, that the company represented by CEO C is in the process of acquiring the company managed by CEO D, and can then profit by shorting the shares of the company managed by CEO C, and going long on the stock of CEO D's company.
To obfuscate 'the trail', the hedge funds may use a combination of opaque OTC derivatives - to conceal the short portion of the trades; and, they may execute the long portion of the trade using low-latency trading systems that are so fast, that no one (from the outside) can tell that the transaction is transpiring.
The scenario above may seem like a fanciful suggestion, but ask yourself this question: why do most hedge funds have armies of private investigators on their 'unofficial' payrolls?
