How to Avoid Insider Trading by Using Legal Data Mining Techniques – Introduction
Access to data is very important for any trader. Traders who are first to get data end up being more successful. This is the main reason why hedge funds spend tens of thousands every month on Bloomberg Terminal, Reuters Eikon, or Factset Data. It is also the main reason why several hedge fund managers and their associates are currently locked up. A good example is Matthew Martoma, a former trader at the now-defunct SAC Capital. Martoma was accused of getting material non-public information about a new drug called Bapi. He will be out after 8 years.
The benefit of getting this information is that you can trade with it. For example, if you receive information that Goldman Sachs will upgrade a company before the open, you can buy the company and benefit from the immediate reaction from the market. Another way to benefit from insider information is to get the company’s quarterly results before they are released. For example, if a company is releasing its quarterly results tomorrow and you get information that it will miss expectations and lower its guidance, you can short it and benefit from the lower price. There are many types of information that you can use to make trades.
To avoid being accused of insider trading, there are many legal ways you can use to get information to help you make money. In this article, I will highlight a few ways to stay ahead.
- First, you can use freely available websites to find data that is directly related to a company. For example, by analyzing the traffic to a company’s website and applications, you can tell whether the company is doing well. Some companies, especially those in e-commerce make money from people who visit their websites. Therefore, if you notice that the traffic of the website is low, it could be a sign that the company is not doing well. Some of the free tools you can use to do this research are SimilarWeb and Alexa.
- Second, you can read the reviews customers are giving a company. Some websites like BBB publish customer complaints. You can start your research by looking at the things the customers are complaining about. In most cases, customers don’t go online to congratulate a company. However, you can still check the frequency in which the complaints keep on coming. You can also mine the data from Twitter by typing the name of the company or the product in the search page. Its results can show you the trends and thus help you make better decisions.
- Third, you can use press wire websites to get important information. Companies submit their press releases to press wire companies for distribution. The content of these press wire services is syndicated in many financial websites like Yahoo Finance. As a trader, you can take it upon yourself to use these wire services to be the first when the press releases are made. Some less-followed companies can release major press releases which are ignored by the media.
Another way to get this information is especially critical to the pharmaceutical industry. As you already know, the pharmaceutical industry is one of the most regulated in the industry. For a drug to be approved, it takes a long time. When the FDA accepts or rejects a certain drug, the response from the market is usually huge. If it accepts a drug, the stock goes high and vice versa. To get this information, you can spend time in the FDA website and look out for the news it releases.
Another way is to mine data from a company’s employees. By reading what the employees have to say about the management or the direction the company has taken, you can tell whether the company is headed in the right direction. A good place to get this information is in Glassdoor, a website that lets employees share their experiences.