Insider Traders Investigated For ETF Stripping, Or How The SEC Is Now Only 10 Years Behind The Curve

Tyler Durden's picture

The brilliant minds as the SEC have finally realized that when it comes to insider trading, they are and will forever continue to be, about 10 years behind the curve. To wit: today, for the first time we learn that the transvestite midget porn fanatics have realized that one can use ETFs, and, gasp, swaps to mask insider trades. So while the SEC brainiacs diligently scour for those who buy massive blocks of stock (or calls) 2 minutes ahead of an acquisition announcement, virtually everyone else has been sneaking by unscathed simply because they have, rightfully, assumed that the SEC are a bunch of retards. Such investigative brilliance deserves to be rewarded with at least one taxpayer funded screening of Long Dong Silver (oh wait, they may realize there could be manipulation in the silver market, and by none other than JP Morgan, if they were to watch that.)

More on this moment of unparalleled SEC serendipity:

The Securities and Exchange Commission is investigating whether Wall Street traders are using exchange-traded funds as a means of disguising insider trading.

ETFs have emerged as a possible mechanism for maximising gains in one stock while potentially masking trading patterns, people familiar with the matter say.

In one scenario, a trader could learn information about a company, buy an ETF that includes the company’s stock, and short sell the other stocks in the ETF.

The practice, known as ETF-stripping, would allow the trader to benefit from movements in the company’s share price without directly buying or selling that stock.

And the money shot, er, line:

Regulators, who work closely with the US justice department, are concerned that traders are adopting this approach, and others, to mask insider trading.

They are concerned about this now, when this has been used by pretty much everyone in the hedge fund community for the past decade? How the hell stupid were all the analysts and traders in the Galleon-SAC insider trading circle to have been caught if the SEC has only figured out about this now???

And it gets funnier:

They are also looking into whether traders are using swaps to stay off their radar. The Dodd-Frank law will require a portion of swaps to trade on exchanges.

The punchline:

Law officials said they needed to use unconventional tactics because traders had become sophisticated.

Actually no, traders have always used these tactics. It is just the SEC that has forever been a bunch of beyond incompetent, porn-addicted rejects from any private jobs that actually pay anything.

But wait: there's more. Hedge funders, even those caught with their pants down, have a prearranged excuse:

The so-called mosaic theory, whereby investors gather large volumes of data to arrive at conclusions that look like they might be derived from insider trading, can be used as a legal defence.

One fund manager charged with insider trading on Tuesday allegedly told an analyst that he need not worry since he was using mosaic theory.

In other words, pretty soon the entire "get-Stevie" affair will fall appart at the seams after it becomes clear that not only is the SEC's enforcement division an evolutionary bottleneck in orangutan to simian evolution, but their lawyers are pretty much pro rata vertically in the whole Darwinian survivial of the dumbest game.

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French Frog's picture

Nothing stopping anyone from sending this link to the relevant SEC departments and see if you get a reply!
More Critical Thinking Wanted's picture
Insider Traders Investigated For ETF Stripping, Or How The SEC Is Now Only 10 Years Behind The Curve

A couple of inconvenient questions:

  • This is the first time ZH has reported about "ETF stripping". Is ZH 10 years behind the curve as well, or did it just want to do some opportunistic whining about the SEC and about the US government?
  • I fully suspect that most of these hedge funds are engaged in insider trading, but the "mosaic" theory is an admittedly tricky method of "plausible denial": how do you prove, before a court of law, that going long ETF and short all-but-a-few stocks was done with the intent to use insider information, not with the intent to go long in the ETF and then (later on) go short on individual components? I mean, if all the trades were done in the same minute then the intent is very clear. If they were drawn out in time then it gets trickier to prove it. Contrast that with the pure act of going long in a given stock which proves the link between insider info and an actual trade very well - without any outright admissions needed, such as a smoking-gun email that says "Gee, lets engage in insider trading, OK?".

I know that on ZH it's a badge of honor to criticise anything that is connected to the government, and that if you ever talk positively about some particular government action it instantly moves your reputation next to that of Beelzebub's (not to mention the dozens of junks your post will get), but you should really make sure your specific criticism is at least borderline true and justified.

It's not like there's any lack of real government screw-ups to report about ...


StychoKiller's picture

You write like a smart person, why not lend your brainz to the SEC?   Seems like they need some help with the non-pr0n portion of their job...

AN0NYM0US's picture

That and


Egypt's army 'involved in detentions and torture'

Military accused by human rights campaigners of targeting hundreds of anti-government protesters

fajensen's picture

bah - Obummah and before him Bush outsourced torturing of random terrorist subjects to Egypt exactly for their skills in this area.

Iam_Silverman's picture

"The brilliant minds as the SEC have finally realized that when it comes to insider trading, they are and will forever continue to be, about 10 years behind the curve. "

So, what is the statute of limitations for insider trading and other forms of financial malfeasance?

blind squirrel's picture

I saw firsthand how easy it is to direct SEC audit to deadend queries.  Lazy, unimaginative bureaucratic fucks...

Zero Govt's picture

this article had me crying ....i couldn't have strung together a nicer bunch of superlatives for the SEC 

buzzsaw99's picture

The DOJ, SEC. etc., how funny.

Zero Govt's picture

Yep DoJ is funny and here's some more clown shows you gotta see: USG, TA, EPA, EU, UN, IMF, WHO, IPCC... these comedy acts are all 'coming to town' soon, you'll piss your pants 

fallst's picture

How can you keep up with these freaks?

This is the Only Way. Buried whistle clause in Dodd-Frank. The banksterlobbyists must have missed it somehow.


derryl's picture

I suppose I am not the first to see "apes and swine" at work here.  Animal cunning combined with enormous ego will always find a way to circumvent what a law-abiding people would call "justice".  Who needs a pathetic "nation" when you have a billion bucks of loot in your pocket.

Dr. Engali's picture

Tyler I wish you wrote for the late night stand ups. At least then they would be funny.

lizzy36's picture

$1B Chairsatan bucks really doesn't buy one much anymore does it?

lsbumblebee's picture

I've been researching this while reading Hustler, and to me the problem of getting the SEC to bring charges against insider traders is akin to getting mom to tell dad that she will divorce him if he doesn't call the cops to arrest their son for spying on her sister while she was having sex with mom's husband, or dad.

Bartanist's picture

Good thing durty Mary Shapiro is paid $8 million annually and has received immunity for the crimes she committed in her last two appointments, otherwise we might have someone heading the SEC who was tempted to act on behalf of the fraud banks instead of the investors as was the SEC's original and now tainted (more like soiled beyond recognition) mandate. 

Double down's picture

Are these the guys who are going to take on Expert networks?



Zero Govt's picture

computers: crap in, crap out... SEC expert networks: SEC in, retards out 

gwar5's picture

I wish the SEC was running the IRS

topcallingtroll's picture

Long dong silver. Clarence Thomas' favorite porn movie, but you new that already td. I catch all of your obscure references but rarely mention it. Have to let you know they are appreciated every once in a while.

mark mchugh's picture

Hopefully, we'll get more Long Dong Silver references.....there's gotta be more jokes there.

jmc8888's picture

Tupac had a song about the SEC

"Wonda Why They Call U Bitch."

C-D-O and the Inter Alpha is about to be deceased and monetarism finally be at peace.


As Tupac said, 'I figured you wanted to know, you know, why we call them, hoes bitches, and maybe this might help you understand. it ain't personal. strictly business baby, strictly business.'

When it comes to the SEC (they shouldn't) Wonda Why They Call U Bitch.



jmc8888's picture

and if rap isn't your thing about some (an actual good) Queen?

"Searching around - kick my brains around the expert network floor
These are the days it never rains but it pours POMO

Ee C Be
Ee C Be

People on the streets- ee yada yada..
People on the streets- ee yada yada yada....

It's the terror of knowing the that SEC doesn't know what the fucking Monetary world is all about

Watching 'good' hedge funds
Screaming 'we already figured it out'

Pray tomorrow - the markets melt up higher...higher..high
Pressure on people - except the people on wall street

Turned away from reality like a blind man
Sat on a fence shaped like dildos while at work
Keep coming up with sophistry
while watching midget porn


Insanity market -laughs at the SEC - capitalism is cracking

No we can't give monetarism one more chance
No we can't give imperialism one more chance
No we can't give bailouts give bailouts give bailouts give bailout give bailouts
Cause Monetarism is such an old fashion ideology
And monetarism dares you not to care for
the people on the edge of the night
and monetarism dares you to care for banksters and fascism
Instead of caring about ourselves
This is our last chance

This is our monetary system

This is ourselves

Under Pressure
Under Pressure

Perhaps it's a bit more 'her generation'

jmc8888's picture

...and finally Mary, if you still can't comprehend, then maybe Sesame Street can break through the SEC's obvious 1st grade reading level.

"Sunny Day
Bernanke's presses sweepin' the bond vigilantes away
On my way to where the frauds are sweet!!

Can you tell me how to get,
How to get to Wall Street

Come and play
According to the SEC Everything's A-OK
Friendly regulators there
That's where we skeet

Can you tell me how to get
How to get to Wall Street"


darkaeye's picture

"an evolutionary bottleneck in orangutan to simian evolution"

Thanks TD.  That makes cleaning nose-blown coffee off my monitor and keyboard totally worth the trouble.

MarkS's picture

I'll take the other side of the argument just to make the site ballanced...

The SEC is like any large regulatory organization.  In the end, Congress and the Administration get the results they want.  They do so using 3 main mechaisms;

1.  They appoint the Chairman - name all of those Chairman that you have been really impressed with...ok, name 2 then

2.  They create legislation - no need to ellaborate here...Frank-Dodd

3.  They decide on budget - when the SEC does start to go after the Street they get their budget cut

Do you really think that Capital Hill politicians want their Wall Street sugar daddies to face all that much scurtiny?

There are pretty smart people on this board and how many of us would take the pay cut required to go work for the SEC? 

How many would put up with ass hat political appointees who knew nothing telling us what to do?

Then, when you do find something and you can make it stick, you get your ass chewed on and face possible public humiliation for not finding it fast enough.

This isn't meant to excuse poor performance, just to explain it.




Fíréan's picture

retards, midget transvestites .. porn fanatics ...

is this supposed to be clever journalism ?

Why not just stick to the story and the facts ?


this website use to be, and still often is, an intelligent read, please don't insult readers intelligence by resorting to this type of writing.

Mercury's picture

That is sticking to the story and the facts.  Google "SEC" and "porn" and you'll see what kinds of activities often take precedence over actual law enforcement.

StychoKiller's picture

Truth has a rapier-sharp wit, deal with it folks! :>D

Mercury's picture

Ha! it seems like the mosaic theory excuse was born the day Reg FD came out.  The term may actually have been lifted from SEC language clarifying acceptable/unacceptable behavior under the (then) new law.

Dude, I put all the tiles together and figured out the CEO was about to have a heart attack...

dvsteenk's picture

Isn't the whole set of derivatives (options, futures, ETF's) that are available nowadays designed to mask insider trades? The big money is not necessarily made in the stock trading itself, but in the invisible profits generated by trading derivatives with insider knowledge: based on direct and indirect price manipulations of stocks, commodities, bonds and currencies through predatory HFT and other frontrunning scheming, the derivatives that are connected to it are pushed in the wanted direction, moreover with huge leverage. In that respect it doesn't matter anymore whether S&P is at 1000 or 1500, only the programmed movement of stocks up or down counts (whichever squeezes best at any moment, now it's squeezing shorters). Profits from stock trading are probably insignificant or even negative, as they are being offset by huge profits from nicely covered up derivatives trades. Some call it smart hedging. Others call it plain illegal manipulation.

Mr. Poon's picture

A few responses.

  • As noted by More Critical T..., above, this is the first we are hearing about this from Zero Hedge about the possibilities of ETFs being used for insider trading, so the government is not the only entity that is "ten years behind".
  • ETFs have been around for some time, but volume has gone up to significant levels only in the last few years.  This is the first time we are hearing about this because ETFs are, effectively, a relatively recent development.
  • Insider trading on swaps is less likely to happen as the counterparties tend to be sophisticated traders who either have the same insider information, or are able to detect unusual trading activity (e.g., a trader they have dealt with before who, against form, suddenly wants to open a huge, short-term position in the last half hour of trading).  Insider trading on swaps has happened, and has been prosecuted, but is less likely simply because of who is involved.
  • Insider trading on options does happen, and has been prosecuted in the past, but is less common simply because the volume is not as large (even taking into account built-in leverage).  For large-scale insider trading, e.g., enough to power the returns of a multi-billion-dollar hedge fund or prop trading desk, high volume instruments like equities and bonds are the only real routes to go; credit default swaps would certainly work, but are problematic for the reasons stated above.  That's why so much insider trading is straight equities--options just don't have the volume necessary.  (Front-running a Fed announcement is a different matter, as the volume in index options is very large.)
  • Silver is regulated by the CFTC, not the SEC.  You guys are financial professionals, not just anonymous bloggers with zero real financial experience, right?
TimeToChange's picture

I'm skeptical of this too.  How is this supposed to work?  Even supposing a name is 10% of an ETF, and even supposing a merger or acquisition pops it by as much as an astonishing 50%, owning the ETF is a pretty deleveraged bet.  You can leverage up in options on the ETF, true, but you'll pay a premium to capture it because you'll have to go in or near-the-money to catch it.

And I could be a dunce, but I don't see why anyone would go long the ETF and short components (except the one you expect to ramp).  Why would the other components sell off?  Do you expect selling from redemptions?  Do you expect selling if the ETF rebalances?  Why would you expose yourself to market risk in a lot of names you know little about?

If these questions are reasonable, I think it's more evidence the SEC doesn't know what the hell it's doing than anything else.  If anyone has details I'd love to hear them because this is far from obvious to me.


CapTool's picture

Its actually easier with futures and doing a custom basket that captures most of the risk, you get a great margin deal and you dont have to do near as many names. Theres a little risk but not that much so long as you make sure beta is in line and stay away from other risks. if its bad news the correct strategy is to do spu puts or other related puts and go long basket minus names you dont want.  Either way its pretty easy, and all depends on getting decent margins. It works well with sector etfs one way, and better with large cap another. You have to look at complete combination of whats traded, and the fact that news often seems to be priced in already as it comes out. Plus its actually often cheaper to short the etf in this environment. All I can say is follow the volume in swaps stocks and etfs.

CapTool's picture

Actually its pretty easy, but the trick is using TAS orders to get the right price. Its really no different than futures vs baskets without all the components, Its still a little risky but I would say look for large creations in etfs and sudden increases in swap and future position that are only held for a day or so. otherwise the expense gets to be terrible.