At Least A Quarter Of All M&A Deals Involve Insider Trading, Study Finds

Tyler Durden's picture

As if the market needed any further proof it is not only manipulated and rigged (at least under a legal system that classifies trading on insider information as illegal), but is constantly abused by those with material, non-public information - i.e., insiders - here comes a study conducted by professors at McGill and New York Universities, which, as the NYT summarizes, finds that "A quarter of all public company deals may involve some kind of insider trading."

Here we would add 'at least' because what the study's authors have not looked at are other derivative products like CDS - and especially 2s/7s steepeners ahead of LBOs - which, like OTM equity calls, provide just as material returns when traded ahead of a transformational announcement, and which, unlike equity, are so far below the SEC's radar, virtually all sophisticated money manager use credit default swaps as their preferred method of trading on illegal information.

And now, back to the Efficient Market Hypothesis.

From the study's abstract:

We investigate informed trading activity in equity options prior to the announcement of corporate mergers and acquisitions (M&A). For the target companies, we document pervasive directional options activity, consistent with strategies that would yield abnormal returns to investors with private information. This is demonstrated by positive abnormal trading volumes, excess implied volatility and higher bid-ask spreads, prior to M&A announcements. These effects are stronger for out-of-the-money (OTM) call options and subsamples of cash o rders for large target fi rms, which typically have higher abnormal announcement returns. The probability of option volume on a random day exceeding that of our strongly unusual trading (SUT) sample is trivial - about three in a trillion. We further document a decrease in the slope of the term structure of implied volatility and an average rise in percentage bid-ask spreads, prior to the announcements. For the acquirer, we provide evidence that there is also unusual activity in volatility strategies. A study of all Securities and Exchange Commission (SEC) litigations involving options trading ahead of M&A announcements shows that the characteristics of insider trading closely resemble the patterns of pervasive and unusual option trading volume. Historically, the SEC has been more likely to investigate cases where the acquirer is headquartered outside the US, the target is relatively large, and the target has experienced substantial positive abnormal returns after the announcement.

And some more:

We document evidence of a statistically signi cant average abnormal trading volume in equity options written on the target rms in the US over the 30 days preceding M&A announcements. Approximately 25% of all the cases in our sample have abnormal volumes that are signi ficant at the 5% level, and for 15% the signi ficance is at a 1% level. The proportion of cases with abnormal volumes is relatively higher for call options (26%) than for put options (15%). Stratifying the results by "moneyness", we find that there is signi cantly higher abnormal trading volume (both in average levels and frequencies) in OTM call options compared to at-the-money (ATM) and in-the-money (ITM) calls. We also find that ITM puts, as well as OTM puts, trade in larger volumes than ATM puts. This is strong evidence that informed traders may not only engage in OTM call transactions, but possibly also ITM put transactions. In addition to evidence of abnormal trading volumes in anticipation of M&A announcements, we provide statistical evidence that the two-dimensional volume-moneyness distribution shifts signi cantly, to OTM call options  with higher strike prices, over the 30 days prior to the announcement day.

For once we agree with the NYT's Andrew Ross Sorkin, even though he doesn't actually present an opinion but merely concludes that "the results are persuasive and disturbing, suggesting that law enforcement is woefully behind — or perhaps is so overwhelmed that it simply looks for the most egregious examples of insider trading, or for prominent targets who can attract headlines."

There is much more in the full study (link), but here are is some of the pretty charts that back the findings:

Figure 1 illustrates the daily average option trading volume around the M&A announcement, from 60 days before to 60 days after the announcement date. Figures (1a) and (1b) plot the average call trading volume for, respectively, the acquirer and the target. Figures (1c) and (1d) plot the average put trading volume for, respectively, the acquirer and the target. The bars represent the average daily trading volume across all M&A deals, where for each deal, the daily volume reflects the total aggregated volume across all traded options. Volume is de ned as the number of option contracts. Source: OptionMetrics.

Figure (2a) plots the average abnormal trading volume for, respectively, all equity options (solid line), call options (dashed line) and put options (dotted line), over the 30 days preceding the announcement date. Volume is de fined as the number of option contracts. Figure (2b) reflects the average cumulative abnormal trading volume for all options (solid line), call options (dashed line) and put options (dotted line) over the same event period. Figures (2c) and (2d) plot the average abnormal and cumulative abnormal trading volume for call options in M&A transactions that are either cash- financed (solid line) or stock- financed (dashed line), over the 30 days preceding the announcement date. Source: OptionMetrics.

And the punchline: Figure 5 plots, for the target companies, the average excess implied volatility relative to the VIX index for the 30-day at-the-money (ATM) implied volatility from, respectively, call (dashed line) and put (solid line) options, over the 30 days preceding the announcement date. Source: OptionMetrics.

And now, BTFATH in this "unrigged" market in which the sucker is, well, you.

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Dixie Rect's picture

And this is new news?

Manthong's picture

“a legal system that classifies trading on insider information as illegal”

...except if you are or work for a .gov legislator

max2205's picture

Be an insider.....stay long....

knukles's picture

And where's the SEC been for all eternity?  ALl those suspicious options trades which they never even see whose palced the orders and connect a few dots?
That midget tranny porn must be addictive... Certainly distracting....

manofthenorth's picture

100% of ALL transactions on Earth are corrupt !! As long as the money masters control ALL currencies , every transaction and asset price is corrupted and controlled. And if that is not enough they will just put a gun to your head and take it.

GOLD and SILVER are BANKSTER Kryptonite

NotApplicable's picture

And without this corruption, "insider trading" would be moot, as it is nothing more than people acting in their best interest.

But NOOOOOO! They've got to create a special class of privileged people, then bind them with laws so that they cannot exploit their privilege.

As with everything done by politicos, it's fuckin' derp squared.

Manthong's picture

“where's the SEC been for all eternity?”

Geez, Knuck.. it almost seems as if you think .gov is there to help rather than exploit.


(and HTF do you get the fonts that tiny?)

Flakmeister's picture

Don't be naive...

There was plenty of corruption and the like in the days when guildsmen and bankers were stackers...

ParkAveFlasher's picture

Super Chilton was on it, but then he ran into departmental budget restrictions, and had to cut down on Post It consumption, and so was drawn off the chase.

Soul Glow's picture

SEC, CFTC, Fed, and Treasury heads sponsered by JPM and GS.

Move along....

Da Yooper's picture

"the results are persuasive and disturbing, suggesting that law enforcement is woefully behind —



so called "law enforcement" is a friggen joke

ParkAveFlasher's picture

These charts courtesy of Huda-Thunkitt Analytics LLC, winner of the 2012 Captain Obvious Award & 2013 N.S. Sherlock Award.  Your trusted source for keen observations.

ebworthen's picture

Rigged casino.

Magnets under the roulette wheels.

alien-IQ's picture

what I find amazing is that somebody had to conduct a "study" to arrive at this information. For fuck sake, it wasn't obvious enough?

slightlyskeptical's picture

Exactly, options activity is a tell. So if you see big buys of OTM call options, jump in for the ride. Or you could just follow Phil Mickleson around.

NoWayJose's picture

Pssssssst - it's WAY more than a quarter.  Mergers are NOT designed to help grandma who holds a 100 shares - they are designed to make the founders of the companies being bought rich beyond belief.

Soul Glow's picture

Grandma has her dividend.  Tell her to shut up, eat her catfood, and let the professionals handle business.

Handful of Dust's picture

SEC and Holder are all over this I'm sure....



cn13's picture

The only purpose this type of information serves is to prove that we have a priviledged class in the U.S. that is literally above the rule of law.

And it also rubs our face in the fact that there is absolutely nothing we can do about it.

Just like our manipulated price indexes (I no longer refer to them as markets) people have become complacent and resigned to the everyday theft done by the "too big to fail" banksters and their connected ilk.

LawsofPhysics's picture

No shit sherlock.

Full faith and credit motherfuckers...

yogibear's picture

SEC has been busy with their porn site browsing. Not enough time to look at any fraud.

Inthemix96's picture

All within the 'Spirit' of the 'Law'?

You fucking filth are in for one fuck of a suprise.

All for 'Greed', ruin countries, wreck lives, destroy the very paths you walk on, destitute your fellow man, and you did it all for 'Personal Gain' and bastard 'Greed'.

The depths of Hades is far to good for you cunts, far to good.

Filth, utter contemptible filth.

To a man.

venturen's picture

Oh it is good being a TBTF criminl banker!!!!



venturen's picture

I know congress can trade inside info....I assume he SEC, Treasury  and Justice department can as well!

Mi Naem's picture

"At Least A Quarter Of All M&A Deals Involve Insider Trading" 

I don't believe it - no way it's that low. 

Last of the Middle Class's picture

i would think maybe a quarter of them at best don't involve insider trading in the great TBTF government casino.

NotApplicable's picture

I'm going to assume that "insider trading" is one of the biggest reasons for any and all M&A at this point, given that all corps are being hollowed out from financialization.

Honestly, other than debt-fueled dividends driving capital consumption, what's left?

NOZZLE's picture

The more polluted the option market becomes with abnormal insider activity the less easy it will be to detect in the future.  Keep watching that porn and collecting your $150K+ paychecks for doing jack shit, it will all turn out well in the end.


bugs_'s picture

As JR said - "where there's a way there's a will"

daedon's picture

Only a quarter ? How can that be ?

Rodders75's picture