Website Overview - Tracking Returns to Retail Investors from Mirroring Trades by Corporate Insiders
Returns from Insider Trading
Many academics and investors have studied insider trading. But most have studied the returns to the insider and not the return to a retail investor who, using only publicly available information about such trades, mirrors all such trades. This website will attempt to remedy that problem by presenting a wide range of studies of insider trading data, using my own database containing millions of insider transactions reported on the SEC's website over the past 19 years, with a focus on hypothetical returns to retail investors assuming such investor mirrored the trades of insiders after such trades were publicly reported.
Insiders Tend to Outperform the Market on Their Purchases and, Perhaps, Their Sales
The evidence suggests that insiders make, on average, market-beating returns on purchases of the stock of the company that they run. As this website develops more fully, you will see some of that evidence presented on this website.
Some evidence also shows that insiders may also sell at advantageous times, as some studies suggest that stock sold by insiders tends, on average, to underperform the market over the subsequent 6-24 months. Perhaps this is true, and perhaps it isn't. As you'll see on this site at some point, the evidence is mixed as to whether insider sales actually underperform; it really depends on how you measure underperformance.
Mirroring Insider Buys is Superior to Mirroring Insider Sells
Having evaluated this information myself, I believe that both the rationale for why an insider should mirror an insider's sales as well as the evidence that such a strategy would work are lacking. Put another way, a retail investor who is looking to trade on the basis of the trading activity of market insiders would be substantially better served by mirroring only purchases, rather than mirroring sales. The opportunity and odds for profit are materially higher when mirroring only purchases. Hence, the primary focus of this website will be evaluating potential returns from mirroring insiders' buying activity and not their selling activity.
Refreshing the Data in the Book "Investment Intelligence from Insider Trading"
In 1998, H. Nejat Seyhun, currently a professor at the University of Michigan, wrote a book about the returns on insider trading. The book, which is outstanding, is called "Investment Intelligence from Insider Trading." I highly recommend the book, and it is an interesting read.
In the book, Mr. Seyhun evaluated insider trading returns in a large number of ways. Among others, he evaluated whether insiders outperform the market, stock price reaction to insider trading, whether certain types of insiders outperform other types of insiders, whether volume of stock traded matters, whether firm size matters, whether consensus among insiders either in a company or an industry correlates with outperformance, and whether future stock market returns can be forecast using aggregated insider trading data. He also evaluates a number of potential "rules" that could be followed mechanically and whether any such rules would outperform the market.
All of these are good questions. But an investor would be well-served to perform further research before following any of the trading rules proposed in Mr. Seyhun's book. I identify the following two issues as required research:
- Do the return correlations cited in the 1998 book still hold today? A quarter of a century has passed since the book was written; do excess returns from insider buys still hold today, or has market efficiency squeezed them out? The beauty of this question is that we have a rigorous study of insider trading returns in the book that can be tested against 25 years (or, to be more accurate, 19 years) of out-of-sample data. If you are curious about the answer to this question, then this site is for you - analyzing and answering this question is one of the primary purposes of this site.
- What are the returns to retail investors from mirroring insider trades? All of the measurements in Mr. Seyhun's book were measures of the returns to the insiders. This was probably primarily a product of necessity - at the time the book was written in 1998, public reporting of these transactions was delayed a great deal. But under applicable securities laws, rules, and regulations in effect today, all such transactions are now required to be reported in a fairly rapid manner - within two business days of the transaction - and so it now becomes possible to measure the hypothetical return to a retail investor who mirrors the trades. As you'll see, any returns and any over- or under-performance reported on this site will be those returns that would have been achieved by a retail investor mirroring such trades and not returns to the insider.
When the book was written in 1998, transaction costs were also a material consideration - especially since many insider trade mirroring strategies require high-to-very high transaction volume. But transaction costs and trading commissions have declined tremendously over the past 25 years, meaning that any such high-trade volume strategies no longer have to overcome substantial transaction costs to be profitable. I intend to post on some of the very interesting potential strategies that could be followed (which would also involve substantial risk) if one were to follow a very high trade volume approach.
How Can Returns to A Retail Investor Be Measured?
You might wonder how we could accurately estimate what the returns would be to an investor who was mirroring the insider's trades. The answer is easy, assuming we make one critical assumption:
We assume that all such trades are mirrored on the third business day after the date of the trade.
In effect, we are assuming that (i) corporate insiders report their trades within the two business day window following the trade as required by law (a very good assumption, as this is what occurs in virtually all insider transactions), and (ii) the hypothetical trade-mirroring retail investor discovers such trade and mirrors it at the close of the third business day.
While this would require that a retail investor act quickly, it is not an unreasonable assumption. Trade information is widely dispersed and easily acquired. Assuming an investor has already pre-determined a formula or evaluation method for such information, the retail investor can quickly act. Giving them at least one business day to do so (and perhaps more, if the trades are reported the same day as the trade or the first business day thereafter) is both realistic and sufficient.
Substantial Spread in Returns from Different Insider Trading Strategies
As I will show in posts on this site, different insider trading strategies vary widely in both the certainty of their signal and the variance in their returns. Though it is difficult to make blanket statements, it is generally true that those strategies that generate the highest certainty of market outperformance are also the least frequently occurring. Similarly, those with the lowest certainty of outperformance - as measured on a per-trade basis - are the most frequently occurring signal.
I intend to evaluate and analyze a number of these strategies. Some show promise of substantial market outperformance. But often they come with a downside in the form of either (i) infrequent trading opportunities (the time between signals is typically measured in years) or (ii) highly frequent trading, which can be both administratively burdensome to track (both from a perspective of tracking what you bought, when, and when it should be sold and from a tax reporting perspective) and tax-inefficient (if held for less than a year and, therefore, not subject to long-term cap gains).
Please visit this website periodically if you are interested in seeing articles on these topics. As you can probably imagine, this is a broad topic and it will take a substantial amount of time to cover many of the potential strategies.
How Information Will Be Shared
Over time, I will continue to post new analysis of various facets of insider trading and whether there are strategies that, on a historical basis, would have outperformed the market. Please check back occasionally for new content.
Disclaimers
Not Investment Advice
The content on this website is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained on this website constitutes a solicitation, recommendation, endorsement, or offer by this website, its authors or contributors, or any third party service provider to buy or sell any securities or other financial instruments in this or in in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.All content on this site is information of a general nature and does not address the circumstances of any particular individual or entity. Nothing on this website constitutes professional and/or financial advice, nor does any information on the website constitute a comprehensive or complete statement of the matters discussed or the law relating thereto. Neither this website nor any of its authors or contributors is a fiduciary by virtue of any person’s use of or access to the website or its content. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of any information or other content on the website before making any decisions based on such information or other content. In exchange for using the website, you agree not to hold this website, its contributors and authors, its and their affiliates, or any third party service provider liable for any possible claim for damages arising from any decision you make based on information or other content made available to you through this website.
Not Legal Advice and No Attorney-Client Relationship Formed
The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Information on this website may not constitute the most up-to-date legal or other information. This website contains links to other third-party websites. Such links are only for the convenience of the reader, user or browser; this website and the author do not recommend or endorse the contents of the third-party sites.Readers of this website should contact their attorney to obtain advice with respect to any particular legal matter. No reader, user, or browser of this site should act or refrain from acting on the basis of information on this site without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney and your individual investment adviser can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this website or any of the links or resources contained within the site do not create an attorney-client relationship between the reader, user, or browser and website authors, contributors, or their respective employers.
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The content on this posting is provided "as is" and without warranties of any kind. No representations are made that the content is error-free. You bear all risks associated with the use of this website and its content, including, without limitation, any reliance on the accuracy, completeness or usefulness of any content available on this website. This website, its authors and contributors, and its and their affiliates, employees, agents, and representatives disclaim all warranties, express or implied, including, without limitation, all warranties of title, non-infringement, accuracy, completeness, usefulness, merchantability, and fitness for a particular use, and warranties that may arise from course of dealing / performance or usage of trade.
Limitation of Liability
YOUR EXCLUSIVE REMEDY FOR DISSATISFACTION WITH THE SITE AND CONTENT IS TO STOP USING THE SITE AND CONTENT. NEITHER THIS WEBSITE, ITS AUTHORS AND CONTRIBUTORS, NOR ITS AND THEIR AFFILIATES IS NOT LIABLE FOR ANY DIRECT, INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL OR PUNITIVE DAMAGES, UNDER ANY THEORY OF LIABILITY, INCLUDING WITHOUT LIMITATION, DAMAGES FOR LOSS OF PROFITS, USE, DATA, OR LOSS OF OTHER INTANGIBLES. IN PARTICULAR, AND WITHOUT LIMITATION, WE WILL NOT BE LIABLE FOR DAMAGES OF ANY KIND RESULTING FROM YOUR USE OF OR INABILITY TO USE THE SITE OR CONTENT.About the Author
Brad G Grounds is an attorney (but see the important disclaimers above). I've been following, studying, and analyzing trades made by corporate insiders for years. I maintain an insider trading database, which contains all of the insider trades reported in the SEC's EDGAR database going back to 2003. My database is updated regularly and contains millions of transactions. Out of those transactions, I sift through for only those reflecting open market purchases or sales. These transactions - which still number in the millions - are the basis for the analysis presented on this site.
