The ECB published a paper earlier this week pointing at potential insider trading in the US. Alexandre Kurov, Alessio Sancetta, Georg Strasser and Marketa Halova Wolfe, the co-author of Price drift before U.S. macroeconomic news: private information about public announcement?, believe to have found some evidences of insider trading.

It is entertaining that the ECB tries to find evidences that the US markets are rigged, instead of looking inward. Nevertheless, the paper displays some interesting facts:


These graph show the variations of the prices of the S&P 500 e-mini future contracts (on the left) and of the 10-year Treasury Notes futures (on the right), from 2008 to 2014, for the 30 minutes before and after the announcement. The dashed line show the +/-2 standard deviation range, that is about 95% of the observations. The announcements that have been taken into account are the following: CB Consumer confidence index, Existing home sales, GDP preliminary, Industrial production, ISM Manufacturing index, ISM Non-manufacturing index, and pending home sales.

All these announcements have the ability to move the markets, as they impact directly all the investors which have a macro strategy, or that are simply affected by general economic news. For these announcements, it seems clear that the 'instinct' of the market is surprisingly accurate... close to half the total drift occurs before the release goes public.

The researchers identify 2 potential causes for this: "superior forecasting", and "insider trading". Of course, it is difficult to know why someone with superior forecasting would start to place his bets 30 minutes (or rather typically 15 minutes according to the findings of the paper) before the announcement. It could still be explained: for example, the investors might want to limit their exposure to any other market movement than the announcement. If they place their bets 2 or 3 days before, they might be hurt by other variations and other events than the annoucement which they successfully forecast.

$27.5m per year

The paper has the kindness to answer the question everyone has on its lips: how much money did the insiders make (if there is indeed insider trading)? The paper is quite precise, and gives us an estimate of $119m for the e-minis and $46m for the 10-Y treasury notes the  during the period considered (2008-2014), for a total of $165m, or $27.5m per year.

If I was to do such things, I would get highly leveraged: first I'm sure of my shot (I've got insider information!), and secondly, if I get caught, it's going to be expensive... So you'd better keep it relatively small in order not to raise too much attention. And when you want to keep something small, but still have a hefty returns, leverage is what you're looking for.

Missing pieces

Though the paper is convincing, it is still not enough to be 100% sure that there was any insider trading. First of all, the researchers looked at a wide universe of announcements, and selected those which best fitted their hypothesis, with a confidence level often around 95% (i.e. 1 chance in 20 that you find only a fluke).

A deeper analysis of the events for which nothing was identified might also have shown interesting results: for example, are there some announcements for which the surprise is real? i.e. for which the time 0 changes consistently the direction of the market variation?

The paper can be found on this link.