What's not being said here is that for the trader to have timed his bets so precisely, the reporter would have had to tell him when the story was coming out.
The anonymous sources on Bloomberg M&A scoops all have insider information one way or the other (think "provider of professional services in the deal space"), otherwise they would have nothing to say. While many of them are not stupid enough to trade on that information, nearly all of them get some kind of benefit from it, usually in the form of two-way information exchange with the reporter. Since they work on deals, they want to know about deals, because their livelihoods depend on deal flow.
VCs know this dynamic well, but they are far less regulated, because they primarily work with private companies, not public ones.
> What's not being said here is that for the trader to have timed his bets so precisely, the reporter would have had to tell him when the story was coming out.
Based on what are you speculating this? I just looked at the indictment, which is linked in the article. Page 8 shows that the timeline between the relevant inside activity and the article’s appearance in Bloomberg running to multiple weeks or even a month. More generally, I don’t see anything that would require an inside trader to know exactly when a news story on these kinds of topics is going to come out. If they know a stock is likely going way up SOMETIME in the near future, that is enough to conclude that the trade is a sure bet. So, no need for a specific tip (as to article timing) from the reporter, and therefore presumably no need for complicity by the reporter.
*I do not intend this comment to mean I believe the actual reporter actually was not complicit. I don’t know the facts of this case beyond what is stated in the story linked here.
> Peltz bought Ferro stock via others’ accounts, culminating with his last purchase at 9:37 am on March 15, 2016, according to the indictment.
> Around six or seven minutes after that final purchase, Bloomberg posted a scoop by Hammond and another Bloomberg reporter under the headline, “Ferro Said to Have Received Takeover Approach From Apollo,” a major private-equity firm.
A 6-7 minute gap implies coordination and foreknowledge of when the story would go out.
He made a series of purchases... ok... of course his last purchase was shortly before the story was published. As to this being his last purchase, well of course—why would he keep buying after his insider advantage had evaporated? At that point there would be nothing more to take advantage of. Anyway, this does not show awareness on the part of the reporter.
Yes, the fact that his last purchase was close in time could show that he received timing information, but it could be that he was making lots of purchases over time and simply stopped once the story came out.
You note that he started selling after the scoops were published. Again, this doesn’t prove anything about the reporter’s (non-)complicity. I.e., OF COURSE he started selling after the story published. What did you expect him to do? He was waiting on the story to be able to trade on effects of its publication. Once it was published, the stock’s price would have shifted (presumably upwards) based on those facts—no more reason to hold the stock!
He bought options, which have time decay. Ok, but we don’t know that he bought options expiring within a few days or weeks rather than months. Anyway, these deal scoops were going to come out sooner or later—but reporters want to avoid being scooped, so they typically come out sooner.
Overall, I’m not convinced there’s anything here. Of course a criminal trial would/will make this all clearer...
I don't think I do. To me it looks like some last-minute greed. He would have been smarter to keep his transactions further from the scoop.
But as I said, the nearness in time only implies coordination. I can't prove it. A trial might, or might not. I doubt that all the communications between the reporter and Peltz's burner phones were recorded.
The expiration date on the options would be interesting to know. If they were very short-term options (lower time decay) only slightly out of the money (higher time decay), that would be even stronger evidence.
The sales within a minute of publication are also strong evidence that Peltz knew what was coming when. You don't want the off chance of a sudden stock market crash to get in the way our your insider trading...
I imagine that if the story has been published at 9:31 the purchase at 9:37 wouldn’t have happened and some other transaction would have been his last purchase. He may or may not have been aware of when the news would be published.
That is logically plausible. An insider purchase that occurs minutes ahead of a market-moving event is merely circumstantial evidence, but it is very strong circumstantial evidence.
One thing to note is that Peltz bought options as well as stock. Options suffer time decay. That is, all other things being equal, their value decreases with the passage of time. The better you can time your purchase to immediately precede a market-moving event, the less time decay matters.
In addition, Peltz and his associates started selling their positions within a minute of the scoops being published. Do you think they just happened to be looking at their trading screens during that minute of the day? I don't think they would have left that to chance.
(Edit in response to the comment below: Bloomberg scoops do not appear on the open Internet for at least 15 to 20 minutes after their publication on Bloomberg terminals. So RSS wouldn't explain trades within a minute of publication. If Peltz and his friends were Bloomberg terminal subscribers, they could have set up some kind of alert there, sure. But still, not something you want to leave to chance... Even if you have your phone with you at all times, you're not always able to respond to the alerts that come up.)
>Do you think they just happened to be looking at their trading screens during that minute of the day?
Or they set up something like an RSS feed and had their phones ring when a keyword was mentioned. Knowing the story is coming is enough to make sure you're prepared.
Even if you did have advanced knowledge of when it was supposed to publish you would do this, so they can't betray you or nothing like a time zone mistake can ruin everything.
>Even if you have your phone with you at all times, you're not always able to respond to the alerts that come up.
So you hire someone who is always able to respond. Both parts that yous claim are convincing circumstantial evidence just seem like expected behavior that could be entirely scripted. "Buy all x below y, after z happens sell all x" would lead to both things happening.
They stated the direction of information flow in the article:
The feds allege that Peltz used disposable “burner” phones and encrypted apps to communicate with a journalist, and that the reporter provided “material nonpublic information about forthcoming articles” which Peltz used to trade in the market “just prior to publication of an article about each company written by the reporter.” The indictment describes “numerous contacts” between Peltz and a reporter, including at least one in-person meeting
The anonymous sources on Bloomberg M&A scoops all have insider information one way or the other
Yes, but trading on nonpublic information is not illegal unless it was obtained from someone that the trader knew was breaching a duty to the corporation in disclosing it, and some form of compensation is paid to the person that breached it [1].
So it begs the question...how is simply receiving secondhand information from a reporter prosecutable?
I don't think they are prosecuting Peltz for getting the information from the reporter. They are prosecuting him for this:
"Peltz obtained material nonpublic information about the private equity firm’s interest in Ferro from a member of Ferro’s Board of Directors (the “Ferro Insider”), and/or the Board member’s fiancée (now wife) (the “Ferro Insider’s Fiancée”)."
For sure, that is illegal. But the whole crux of this article, including the title, is about him having made trades just before Bloomberg articles were released, and the article states that this was mentioned in detail in the indictment. It makes me wonder why that is at all relevant if that’s not what he is actually being prosecuted for.
Tying insider trading to a Bloomberg reporter is very rare, although it has happened before, and I linked to one instance above.
Because it is rare, it is newsworthy, particularly for the Columbia Journalism Review. Even if you don't care about journalism, the fact that one of the world's great news organizations and news wires has ties to insider trading should concern you and Bloomberg's top editors, because it's dirty. You just don't want your reporters abetting crimes if you can avoid it.
My guess is that Hammond will not last long at Bloomberg. This story is more about the reporter than about the insider trading. And it is less about the law, and more about journalistic ethics. It doesn't matter whether it is illegal for the reporter to tell Peltz that the story will come out soon; it is certainly against his agreement with Bloomberg.
I don’t disagree. I was just saying that the talking to the reporter aspect didn’t actually have any relevance to the criminal charges - at least not to insider trading. I read the indictment after my comments and, at least from what I can tell, I was right. Though talking to the reporter is mentioned in the facts part of the indictment, it does not appear to be a basis for any of the charges. It’s more of an interesting footnote.
From the article, it seems the information was flowing _from_ the reporter:
> The feds allege that Peltz used disposable “burner” phones and encrypted apps to communicate with a journalist, and that the reporter provided “material nonpublic information about forthcoming articles” which Peltz used to trade in the market “just prior to publication of an article about each company written by the reporter.”
Trying to wrap my head around what you are trying to say. Let's use some example. If you would know that Tesla's delivery numbers were a disaster (they weren't). Knowing that before everybody else would give you a chance to sell at a significantly better price than others.
Could an insider trader get information, not act on it, write an article about his scoop, and then make trades after the article's published? If the publication he writes on is obscure and not followed, is the information still considered public?
Sure, but that doesn't mean it "loses its value unless it is published immediately".
Basically, the info has a certain amount of value, that doesn't really go down. If you pair that information with the knowledge of when it will be published, it goes up in value.
> Basically, the info has a certain amount of value, that doesn't really go down.
I was thinking of the value of the news to Bloomberg, which was mentioned in the article:
At Bloomberg, scoops about deals are highly valued, because beating competitors like Reuters or Dow Jones helps to justify the high price of a terminal, which carries rich veins of data along with news, at a reported cost of around $24,000 a year. The terminals constitute the company’s core business.
If the information is deemed important, then, as soon as Bloomberg is confident in the information's accuracy, it will publish. Once Peltz had a record of giving reliable tips, that would likely happen quickly.
I am not taking a position here on the proposition that Peltz needed to know when the information would be published in order to profit. I am pointing out that, even without being explicitly told by the journalist, he could be reasonably sure that publication would occur quickly, if at all. He could also be reasonably confident that it would be published, given that it is valuable information, and that Bloomberg had demonstrated its confidence in his leaks by publising earlier ones.
The feds may well, of course, have independent non-circumstantial evidence of the journalist informing Peltz about when the information would be published.
It looks like both were involved in trading inside information, one for market operations and the other for articles. If the journalist had a deal (which I can only suspect to be the case), he was facilitating the crime of insider trading.
The journalist has not been charged with anything.
And this actually brings up a fascinating point: is it a crime for a journalist to tell a third party when the journalist will publish a story, if both believe the story will affect the markets?
The journalist isn't telling the third party what the information is -- after all, in this case it seems like it was the third party who supplied it.
And the journalist isn't profiting financially either. They're just getting their story, not a share of profits.
I'm not aware that courts have determined that this is facilitating insider trading. And like I said, the journalist hasn't been charged with anything. But I'm not an expert.
Journalists often have embargoes on their articles. A company may want to announce a new product, will tell a few newspapers but ask them to wait before publishing.
Sure, but violating those embargoes is not a crime. It might (but isn't likely to) violate some contract between the company and the newspaper - which is also not a crime, but may open up the possibility for a civil claim; it might cause the newspaper to stop receiving future releases; it might result in the journalist getting fired, but nothing about violating such embargoes would be criminally prosecutable by the state.
There's no way they caught this person in a few months time, with all the precautions he took. Someone ratted this guy out. Would love to know why the feds don't pursue the big market manipulators, instead trying to make headlines with small fish. Probably can't make anything stick, because they are less than competent and less than fully manned. The rat needs to be exposed.
This has been discussed below. The reporter was giving Peltz non-public information about the stories he was going to publish, which allowed Peltz to better time his trades. The information flow was two-way.
Honestly, who thinks they can get away with moronically obvious insider trading like this? "Oh, I know, I'll take large positions right before this reporter publishes MNPI, and I'll do it five times". Obviously you are going to get caught!
A friend was riding on the tube in the financial district of London and overheard one finance guy explaining to new colleague that the trick to getting good trades was to make friends at companies and learn about new things from them before everyone else knows.
Yeah - this is one stupid example, but if people are saying this kind of thing in a relatively public place as instruction it's probably happening everywhere all the time. You can usually see it in stock trends before some event happens.
Not all crime is sophisticated as you imagine. Most criminals do the first thing that comes to their minds. If they were highly skilled they wouldn't be committing crimes in the first place.
It really depends on what you are trading. For example the prototype of a "dumb" insider trade is getting OTM call options when you know a company is getting a blowout quarter. Large amounts of OTM options trading in a stock that rarely sees much options activity is quite noticeable. When the authorities notice those, they can (and do) find out who got into that position simply by calling all the registered brokers and asking them who did it. (With a court order if need be, because suspicious options activity just before large jumps in stock price is reasonable suspicion of insider trading)
The FINRA database available to regulators is an amazing engineering achievement. It knows all and is how the SEC is able to “replay” the markets after the fact.
Four year old blog post, but gives a sense of scale:
I once bought stock in EBIX. Not too long after I purchased I woke up one day to find the stock down 50%. An anonymous poster on Seeking Alpha had written an article claiming massive accounting fraud at EBIX. There was massive short selling that morning. After following forums and news on EBIX it appeared that there likely was not fraud. The stock would slowly recover, and then another hit piece followed by short selling would massively drop the stock again. This went on for a couple years. There never was any fraud. I sold the stock and swore off buying individual stocks. I’m 100% convinced there was illegal trading activity. Many people in the forums wrote to the SEC about it. The SEC never did anything. It also seemed like this goes on all the time.
Their current market cap is <1Bn. Trading in single names without having some sort of sophisticated fundamental model is seriously inadvisable, especially without some kind of serious trade execution edge. Sorry for your loss, but it's just a bad idea... Develop better models. Any stock that can move 50% in a day, even in retrospect, isn't a serious company to invest in.
Any time there’s a big swing the SEC requests data for transactions before and after. The time period of their requests vary but sometimes they ask for transactions months in advance to look for unusual patterns of activity. Insider trading is a particularly stupid move because it’s only a matter of time before you get caught.
brokers and all licensed financial firms are essentially deputized to freeze and enforce this stuff on behalf of the regulator, who then has time to get a emergency asset freeze rubber stamped by an "administrator law judge" who basically works on staff at the regulatory agency
then you can prove why you aren't guilty by retaining a good lawyer with all that other money you have which isn't frozen, you have that right?
the better way is to use a bot to execute the trades right after publication, or do it manually and lose a little bit of alpha. but he didn't.
Statistically on any stock with a large trading volume there's pretty much always going to be someone who bought up right before a big announcement purely by chance, realized they got lucky and sold immediately afterwards.
It's not obvious to me how you'd separate this from intentional trading on insider information. (Unless you just investigate everyone).
You'll find that even on some fairly large names there isn't all that much activity during the day. There's a lot of names, and there's a lot of trading in the auctions, so the total volume in the market won't result in a steady flow for a particular share.
My guess is it will stick out like a sore thumb if you buy x shares right before an announcement and sell x right after. Especially if you do nothing else. Pretty much as soon as you've exited a second announcement-trade red lights should be flashing.
Some napkin math suggests that there are enough retail trades (8.1M/day) that under some weak constraints (most are for short-term positions, higher market cap stocks are more likely to be purchased) you're still quite likely to find a few people who have "established a pattern" quite by accident.
As long as they're just investigating and not necessarily prosecuting every event that probably sounds fine (I'd be curious to know what the prosecution "funnel" looks like for flagged individuals in real life -- 100%? 1%?), but it's important not to let an intuitive sense for things that are definitely too unlikely to happen by chance to cloud our judgement and create something like another Sally Clark event[0].
What exactly is insider trading?
Last year, if I remember correctly, Facebook released “Messenger Rooms” and it tanked Zoom stock quite a bit when they announced this.
If you were A Facebook engineer and loaded up on ZM puts just before the announcement, would that be an insider trading? With the right ZM puts you would be able to profit immensely.
My understanding is that that would be considered insider trading. It's when you use material non-public information that has been misappropriated -- i.e. confidential information from your employer or from some other entity where you had a duty not to disclose, or such information after conveyance to another party. On the other hand, if you were able to derive such information on the basis purely of what's observable in public, then you would be in the clear. For example, if you saw a Facebook engineer wearing a "Rooms" badge or using the product in a cafe, and traded based on that, then it would be considering public information. IANAL, don't blame me if you follow this advice and go to jail.
Also not a lawyer, don't blame me if you follow this advice and go to jail.
But as I understand it from reading Matt Levine's triply also not a lawyer blog, using knowledge only Facebook has to trade on the market of its competitors is insider trading, on the basis that you misappropiated Facebook's data, and exploited Facebook shareholders. Which sounds like if Facebook ran a quant fund that took information, traded on it and returned the profits to Facebook shareholders, there'd be no grounds for a suit. Might even be more profitable than whatever failure as a service FB intends to roll out.
The is exactly the definition of insider trading. If you're working in a situation when you know material information about public companies and trade on this information, you can get caught.
...and has a duty to the company to keep such information secret.
If you’re an employee, you can’t trade on it. Same if you work at the accountancy that does the company’s financials.
If, however, you hear some employees talking about it in public, it’s fair game. Or if you notice Facebook hiring lots of people with expertise in live audio broadcasting.
It's not quite that simple. If you were in a café and overheard the CEO of some company telling someone else that next quarter will be fantastic, that's non-public material information but you have no duty to keep it secret.
Yes, an even playing field for traders requires all participants to have the same access to information. Otherwise the game is rigged against traders that can't get access to inside information
Price discovery through superior analysis. Not trading on information no one else can obtain. So it's a level playing field when it comes to information access. Same reason public companies have transparency requirements. Otherwise the price is a mechanism for insiders to extract wealth from other investors like a crypto ICO
In the US insider trading laws aren’t about leveling the trading playing field, in fact quite the opposite we use the markets as a price discovery tool because it incentivizes acting on that disadvantage.
Insider trading is about stealing from someone, the shareholders of a firm, the customers of a company etc.
This article explicitly states for one case it describes that the indicted trader received the insider information from a third party, not the journalist.
So it seems the flow of information was from him to the journalist, not the other way around. The purpose would be to get the news out there fast after buying into the stock, as otherwise it may take months for it to be released the normal way or, in some cases such as mergers not yet finalized, to fall through completely.
As such, the journalist wouldn’t have done anything wrong. Receiving and publishing inside information is their job, and as long as the information is accurate it isn’t their job to make up for a lack of secrecy on the company’s part. Since the information was already circulating among unauthorized traders, making it public actually serves to level the playing field and prevent further harm.
While I understand that insider training is illegal, I do find it pretty ironic that part of the "value prop" of a Bloomberg Terminal is that you pay money to get access to market information before everyone else does.
That's not the value proposition of a terminal subscription. All the noteworthy players in finance have a terminal too, everyone is getting the news at the same time.
To clarify, the value of a terminal subscription broadly speaking is (1) access to the social network of instant chat and email (2) 24/7 highly qualified customer support who will respond within tens of seconds (3) bundled access to all sorts of financial apps (functions)
I wonder how much insider trading really happens, even somewhat innocently.
Someone who isn't me (SWIM) was once upon a time casually talking to his colleague (who has insider info) about their company stock. SWIM wanted to sell some of his shares before earning report as they often tanked. Colleague said that the numbers will be good as they want to make the new CEO to look good. SWIM kept his stock past the ER and indeed it mooned.
I think this may be insider trading, but also it may be happening all the time everywhere, most of the time unintentionally...
Failing to make a trade is not the same thing as insider trading.
There is actually a loophole available to executives and other insiders right now that exploits this fact - you can file a 10b5-1 plan with your broker, which allows executives to say "I'm going to sell my shares according to this schedule" and bypasses blackout periods etc. You can then cancel the plan if the numbers look really good and you want to hang on to the shares. No crime has occurred since you didn't actually trade any shares, you simply failed to trade some shares you normally would have.
Yes, this is where witch hunts come from. People like feeling like there are bad people out there and that they have been punished. It can be a dangerous thing, seeking out that feeling, justice should be blind and based on reason, not an emotional high.
He could have avoided being indicted just by making the trades immediately after the publication of the news.
So he could have been ready with his stock, amount and direction (buy vs. sell), and then do it immediately upon the publication, still giving him a time edge while having plausible deniability by claiming that he acted in public news.
HFTs parse news like this the microsecond it comes out, so you wouldn't beat them. You might still be able to make some gains, but they'd be lower than trading ahead of time.
It seems ethically dubious to publicly name a Bloomberg reporter based only on circumstantial evidence.
Don’t get me wrong, it is awfully suspicious that the stories’ timestamps match closely. But I wonder if there’s other info they have that links the reporter to Peltz.
There is no issue when paired with evidence that is directly incriminating. But calling someone out by name on circumstance alone is questionable (in my personal opinion).
That's my hunch, based on the way the "debunking" of Bloomberg's articles was done (lots of people speaking from authority, poorly supported nitpicking about accuracy of illustration and other details, pointing to statements from the companies as authoritative) and the lack of retractions. I also got the sense that certain people who would normally like to speculate about the deeper story or provide historical context/additional flavor were unusually quiet.
The only kind of insider information that you get you in trouble is the one done by (relatively) small operators in the market. If, on the other hand, you talk to directors in a company and, based on the insider knowledge you learn from them about the business, make a large investment, then you're called a smart and sophisticated investor (the biggest example is Warren Buffet).
https://www.bnnbloomberg.ca/the-mystery-millionaire-who-haun...
What's not being said here is that for the trader to have timed his bets so precisely, the reporter would have had to tell him when the story was coming out.
The anonymous sources on Bloomberg M&A scoops all have insider information one way or the other (think "provider of professional services in the deal space"), otherwise they would have nothing to say. While many of them are not stupid enough to trade on that information, nearly all of them get some kind of benefit from it, usually in the form of two-way information exchange with the reporter. Since they work on deals, they want to know about deals, because their livelihoods depend on deal flow.
VCs know this dynamic well, but they are far less regulated, because they primarily work with private companies, not public ones.