Seriously... WTF (options fraud)

[CrushinFelt]

Link to story

Cliff's Notes: Once again option volume a bazillion times above normal occurs the day before a large buyout (Blackstone-Hilton).

Honestly, wtf? How is this not handled yet? It seems that with every major buy-out that this [censored] occurs. 70 options with a strike of $40 were traded in the last 11 trading sessions (TOTAL!). Then 5000 are traded Tuesday. They should prosecute each and every individual that traded them that day and throw them all in jail.

Is the problem that there is no way to PROVE they received insider information? Is trading alone not enough to warrant this? Obviously a few people (MAYBE LIKE 10 OUT OF 5000) were legitamitely trading, but the rest are all frauds and deserve to have all their assets siezed.

And if it is the case that this [censored] isn't something that can be prosecuted because of lack of evidence, then shouldn't they just do away with options? If not then they are basically allowing collusion and fraud.

For some reason this [censored] pisses me of like a mother [censored]. I'm sitting on ass-loads of proprietary knowledge for which I had to sign a bunch of [censored] saying I wouldn't leak anything "material". Then I see this [censored] happening every god damn [censored] day and nothing is being done abuot it.

[censored].

[DcifrThs]

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Link to story

Cliff's Notes: Once again option volume a bazillion times above normal occurs the day before a large buyout (Blackstone-Hilton).

Honestly, wtf? How is this not handled yet? It seems that with every major buy-out that this [censored] occurs. 70 options with a strike of $40 were traded in the last 11 trading sessions (TOTAL!). Then 5000 are traded Tuesday. They should prosecute each and every individual that traded them that day and throw them all in jail.

Is the problem that there is no way to PROVE they received insider information? Is trading alone not enough to warrant this? Obviously a few people (MAYBE LIKE 10 OUT OF 5000) were legitamitely trading, but the rest are all frauds and deserve to have all their assets siezed.

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so how do you find the 10 that are legitimate? what if they all claim that they were watching the flying patterns of executives and noticed a spike in each one's meetings with the other? shouldn't that warrant purchasing call options on the acquired's stock? the simplest would be to try to find relationships between option buyers and the companies or other 'insiders.' often though, that is tough. i'm sure the SEC will investigate but you can't just immediately convict all traders b/c there is some probability that it is ALL legitimate. even if that probability is close to 0, you stand to convict innocent people if you just arrest them all (with a greater than some % confidence interval required by law etc.).

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And if it is the case that this [censored] isn't something that can be prosecuted because of lack of evidence, then shouldn't they just do away with options? If not then they are basically allowing collusion and fraud.

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um, wow. talk about baby out with the bathwater lol.

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For some reason this [censored] pisses me of like a mother [censored].

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i can see that.

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I'm sitting on ass-loads of proprietary knowledge for which I had to sign a bunch of [censored] saying I wouldn't leak anything "material". Then I see this [censored] happening every god damn [censored] day and nothing is being done abuot it.

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sorry bro, don't be tempted to breach the NDAs though since you know the second YOU doit, you'll get arrested.

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[censored].

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agreed.

Barron

[CrushinFelt]

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um, wow. talk about baby out with the bathwater lol.


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I don't know what this means?



[/ QUOTE ] sorry bro, don't be tempted to breach the NDAs though since you know the second YOU doit, you'll get arrested.


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Yup!

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so how do you find the 10 that are legitimate? what if they all claim that they were watching the flying patterns of executives and noticed a spike in each one's meetings with the other? shouldn't that warrant purchasing call options on the acquired's stock? the simplest would be to try to find relationships between option buyers and the companies or other 'insiders.' often though, that is tough. i'm sure the SEC will investigate but you can't just immediately convict all traders b/c there is some probability that it is ALL legitimate. even if that probability is close to 0, you stand to convict innocent people if you just arrest them all (with a greater than some % confidence interval required by law etc.).


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Yes, yes I thought about all that. And there is one major conflict:

The "worst" thing that can happen (according to most people) with any justice system is if any innocent person is convicted for a crime they didn't commit. The very basis of the ideology of democracy, our politial system of choice for which we are willing to go to war and die defending, is that the majority rules. In other words, if something is done that benefits the few rather than the many of a group then that inherently goes against our primary structure as a civilization. It seems to be the case that to not prosecute 5000 people because of the possibility of falsely imprisoning 10 is doing something to benefit the minority.

And though I phrased it strangely, here I don't mean the minority being the 10 people that would be falsely convicted. I mean the people who traded on inside information within the group of traders as a whole.

A counter to this argument is that the benefits the majority receives from options is worth the fraudulent activity that currently happens. That is a question to which I do not have the answer. Options can be replicated, obviously, by other means, so their value is really just the saving of transaction costs. I'm sure that, due to the number of options traded, the amount of savings every year is gigantic and likely dwarfs the amount that people make from insider trading on these deals. So in $-terms, marginally speaking it's likely not a big deal, but is that really the best way to look at it?

Sorry, kind of a rant I know. Just sort of struck a nerve.

[mrbaseball]

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With take overs, inside info, and other illegal activity in the market how do we get in, legally of course. Is there any way to set up a computer program that tracks extremely high volume trading occurrences for options (20 X normal day sales).

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Most firms these days have these kinds of things running and it amplifies these kinds of moves. All of a sudden everyone in the world is seeing what is happening and speculatively jumping onboard. It is far more commonplace than it used to be so you see a real avalanche effect once these things get going.

"Hey! The Dukes are up to something! Let's get in on it."

[DesertCat]

Martha Stewart sold her shares because the CEO sold. She couldn't be prosecuted for insider trading, but got busted for lying to investigators.

There are lots of ways to determine that a merger is pending that involve non-public information that isn't really "insider". Tracking executive travel/meetings would be a start.

[UrmaBlume]

Anybody with any experience in this area knows that if you bought stock or options immediately before a takeover that you will receive a visit from SEC investigators.

These guys are very thorough; they check your trading patterns, relationships with anybody in either company or anybody esle that traded the stock or options. They are very good and very thorough.

As to a scan to find potential takeovers, a scan of deep in the money calls can be more revealing than a scan of stock volume alone.

Deep in the money calls carry very little time premium and are seldom traded in volume. Volume in deep in the money calls is often a sign of sophisticated accumulation.

Discoveing a potential takeover via the technical analysis of volume is not illegal and if the scan is sophisticated enough can offer considerable completely legal opportunity.

[DcifrThs]

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um, wow. talk about baby out with the bathwater lol.


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I don't know what this means?


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it is an old analogy. it basically says that it is a mistake to get rid of the good parts of the system (the baby) along w/ the bad (the bathwater) when trying to improve the system (the tub).

in this case, it means that you'd want to scrap options b/c some people make illegal money? do you know how seriously that would affect the financial market system?

so don't throw the baby (options) out with the bathwater (illegal profiting traders in options).

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sorry bro, don't be tempted to breach the NDAs though since you know the second YOU doit, you'll get arrested.


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Yup!

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so how do you find the 10 that are legitimate? what if they all claim that they were watching the flying patterns of executives and noticed a spike in each one's meetings with the other? shouldn't that warrant purchasing call options on the acquired's stock? the simplest would be to try to find relationships between option buyers and the companies or other 'insiders.' often though, that is tough. i'm sure the SEC will investigate but you can't just immediately convict all traders b/c there is some probability that it is ALL legitimate. even if that probability is close to 0, you stand to convict innocent people if you just arrest them all (with a greater than some % confidence interval required by law etc.).


[/ QUOTE ]

Yes, yes I thought about all that. And there is one major conflict:

The "worst" thing that can happen (according to most people) with any justice system is if any innocent person is convicted for a crime they didn't commit. The very basis of the ideology of democracy, our politial system of choice for which we are willing to go to war and die defending, is that the majority rules. In other words, if something is done that benefits the few rather than the many of a group then that inherently goes against our primary structure as a civilization. It seems to be the case that to not prosecute 5000 people because of the possibility of falsely imprisoning 10 is doing something to benefit the minority.

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that assumes that you KNOW 10 of them are good. what if 4995 are good and legitimate? how do you know that there was not 5 of them who started trading and a systemized program caught the spike in purchases in 4995 other traders' programs and directed them to copy that trade?

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And though I phrased it strangely, here I don't mean the minority being the 10 people that would be falsely convicted. I mean the people who traded on inside information within the group of traders as a whole.

A counter to this argument is that the benefits the majority receives from options is worth the fraudulent activity that currently happens. That is a question to which I do not have the answer. Options can be replicated, obviously, by other means, so their value is really just the saving of transaction costs.

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no. this is not the case at all. for hedging purposes it may be easier but you can never replicate exposure to implied volatility w/o options. never. you can gain exposure to REALIZED vol, but not implied.

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I'm sure that, due to the number of options traded, the amount of savings every year is gigantic and likely dwarfs the amount that people make from insider trading on these deals. So in $-terms, marginally speaking it's likely not a big deal, but is that really the best way to look at it?

Sorry, kind of a rant I know. Just sort of struck a nerve.

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options provid emore than transaction cost savings. they allow easy hedging and have existed in this world for hundreds upon hundreds of years. the value of that hedge is reflected in the demand from producers and thus the price of that option (and that price is different than the difference between delta hedging costs and option transactin costs). it may be possible to replicate that hedge (with a mixture of bonds/underlying etc.) but that is definitely costly when the mkt moves sideways (and requires active management and has a HUGE risk if the market gaps and you can't even get the hedge to work right. it only works when you really don't need it. when you do and something jumps or plummets..and gaps...it will fail) and you don't gain when nothing changes but risk aversion (for those long the option).

Barron