Sunday, November 15, 2009

Inquiries Of Insider Trading: Taiwan & US

Anyone who has been watching stocks over the past year surely must have noticed all the blatant insider trading going on during the day/hours leading up to an announcement. What has been a large problem that continues to be unchecked by the SEC in the US, looks to be plaguing the Taiwan Stock Exchange as well.

The Taipei Times reports of possible insider trading in the Chimei-Innolux merger deal. Things such as this are a huge tip-off that someone was "tipped-off" about the deal:
Two days before the merger was announced, Chi Mei trading volume spiked to 142 million shares on Thursday and 184 million shares on Friday, four times and five times higher than its averaged daily turnover of 34.7 million shares in the first eight trading days of the month respectively, information on TWSE’s Web site showed.
Similarly, in the recently announced buyout of 3COM buy HPQ, the day of the announcement had 3COM (COMS) trading on heavy volume of around 22 million shares, with historical average volume at just around 9 million. Furthermore, there was heavy trading in the options on 3COM where a large lot of calls were bought on the front month options. Keep in mind that this was only about 7 trading says until November OPEX. As most traders know, buying front month options is a disaster in the making, unless you are expecting a large move that the market is not expecting. The time decay in the options in the last 2 weeks will kill your potential for a profitable trade if the direction and movement are not what you fully expect. The WSJ has a good wrap on this here:

Yesterday, options traders scooped up 8,000 near-term “call” options that allow them to buy stock in 3Com at fixed prices. Specifically, they bought November options that allow them to buy the stock for $5 a share, below the $7.90 a share that H-P offered for 3Com. Overall, 22 million 3Com shares changed hands on Wednesday, compared to its 52 week average of about $5 million, according to Bloomberg.

“Somebody knew something was coming,” said Stefen Choy, founder of Livevol, a San Francisco provider of options-market data and analytics, told Bloomberg. “It looks like very unusual call buying. I see this very frequently when there’s a takeover.”

The fact the same company involved in the Galleon case is again being mentioned for unusual trading activity shows how pervasive and persistent insider trading may be. It also shows the endless battled the Securities & Exchange Commission faces in trying to stamp this out. (The SEC, 3Com and H-P have all declined comment on the matter).

As much as I'd like to believe that the bad guys will always get caught, it seems like the SEC is simply looking the other way.


Anonymous said...

Maybe the right question to ask is why SEC is looking the other way...

Richard said...

Definitely. I sort of hinted towards that in my last remark, but I was thinking that the whole time. Perhaps they are in on it. Sad indeed.