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Insider trade on Splunk acquisition?

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Re: Insider trade on Splunk acquisition?

#291

Post by 0cf8612b2e1e »

wallawe wrote: post #249
paws wrote: post #157

Earlier quoted context omitted.

Could you please explain more about who these counterparties are exactly? Do they include brokerages? I'm trying to understand why a counterparty would enter into an arrangement where a stock price change obligates them to financial liability like this. Presumably there's some upside if the stock price goes the other way, but it's unclear who the $ would come from in that case. Also: Who originates options? When some…

Let's say I own a bunch of SPLK and want to make some passive income. I am the counterparty to the call purchaser in this example. I can sell call options 10% out of the money each week and make some nice cash. If my plan was to hold the stock long term, there's no downside risk because if the stock goes down, I get to keep the cash (premium) from selling the calls. If it goes sideways or slightly up I get to keep it…

That still seems like a pretty good deal. You missed out on capturing the entire upside, but lost no real money.

Loss aversion and all that, but it feels like a reasonable strategy where you still come out ahead in the worst case. In the typical case, you can continue to collect those pennies.

Re: Insider trade on Splunk acquisition?

#292

Post by growse »

tptacek wrote: post #191
tfehring wrote: post #177

Earlier quoted context omitted.

That practice has been referred to recently as "shadow (insider) trading". It's an actively evolving area of case law, but the SEC's opinion is yes, see https://wp.nyu.edu/compliance_enforcement/2022/01/19/sec-v-p... Or Matt Levine on the same case: https://archive.ph/5Dlmw

Oh, neat! I hadn't read this, but my hypo is literally case (3). His answer: "who knows?". Excellent. In my hypo and his, the origin of the private information I've acquired is still business my employer has conducted, so there's a better-than-baseline probability that the SEC would see this as misappropriation --- even if my employer wasn't directly going to trade on this, or if it was hard to trace any harm to my e…

The thing where it gets murky though is that the theft argument needs someone to be stolen from, or defrauded.

In classical insider trading, the victims are the investors in the M&A target. I'm misappropriating MNPI about the target, so I'm essentially defrauding the target's investors.

In the "shadow" case, I think it's a harder argument to make. If I work for a potential Cisco M&A target that falls through (as per the GPP), I've got, MNPI about my org, and probably MNPI relating to Cisco. Can I defraud Splunk's investors with that?

Re: Insider trade on Splunk acquisition?

#294

Post by gituliar »

bryan0 wrote: post #49

Can someone explain the mechanics of this specific trade to a noob? The trader bought 550k options yesterday for SPLK to hit $127/share? Since that seemed highly unlikely they were only priced at $.04 each. but now that SPLK is at $145/share they are worth $18 each? so that would be a profit of ~$10m?

I'm not sure this is a true story.

Open Interest is 420 contracts, this is a max number of options someone can hold (for that strike and expiry). See the first line on the first screenshot, just below "Historical Volume / OI". Nobody could hold more than that much contract.

Edit: The total contracts is 127, so it gives 127 x $18 x 100 ~ $230'000 profit. (Seems like the post on Twitter is missing x10 factor.)

Re: Insider trade on Splunk acquisition?

#295

Post by kajumix »

Wouldn't this be simpler if everyone was an insider? A public company releases a significant amount of internal financial and operational information every quarter. What if it was real time? Live stream everything from the boardroom.

Re: Insider trade on Splunk acquisition?

#296

Post by jldugger »

dmazzoni wrote: post #72
jldugger wrote: post #11

Earlier quoted context omitted.

Cisco and Splunk are both HQ'd in SF. If they were at the airport, it was coming back from Jackson hole or something. The real trouble with 'maybe they were legit outsiders' is the options expired specifically today, which means you need to know _when the announcement_ is to profit.

Fun fact: Cisco is actually headquartered in San Jose, but I believe that both companies have large engineering offices in both San Francisco and San Jose. For those who don't know, they're both part of the same metro area (Bay Area) but they're 50 miles apart, anywhere from 1 to 2 hours apart depending on traffic.

Still not taking a flight from SFO to SJC to seal a deal.

Re: Insider trade on Splunk acquisition?

#298

Post by tjrgergw »

kasey_junk wrote: post #288
tjrgergw wrote: post #284

Earlier quoted context omitted.

But.... if you're trading options you're not stealing from the shareholders, right? The person on the other side is also trading options, not a shareholder.

Yeah. This is a philosophical point that the law contemplates. Your option’s position is a theoretical position against the shareholders. I’m not convinced us insider trading laws are particularly logical or valuable (like most economists I think we shouldn’t have them) but you can usually back out the SEC position by figuring out how a shareholder was harmed.

> like most economists I think we shouldn’t have them

Isn't that basically just scamming? I can tell you I have a box full of gold, sell it to you, and then it's not. You think this is ok?

Re: Insider trade on Splunk acquisition?

#299

Post by kobalsky »

tptacek wrote: post #143
eastdakota wrote: post #100

Earlier quoted context omitted.

Yes. The one bit you’re missing is that a call option is the right to buy a stock at a certain price typically on or before a certain date. To make the numbers simple, imagine a stock trades at $10/share. If someone came to you and said: how much would you be willing to pay to have an option to buy the stock for $100/share? The correct answer is: it depends. If it’s the right to buy the stock for $100/share at any po…

This is great, and as good a place as any for the thread to sprawl from, so I'll ask: it depends on how you know the stock is going to shoot up the next day, right? Trading on private information isn't illegal, and there's a huge variety of ways to acquire private information at varying levels of confidence, and in a sense the purpose of the markets is to aggregate everyone's private information to estimate a price.…

you can have an idea of what will happen but the timing is really important.

options change price considerably depending on the length of the contract, this required surgical precision.

Re: Insider trade on Splunk acquisition?

#300

Post by tptacek »

eastdakota wrote: post #281
tptacek wrote: post #143

Earlier quoted context omitted.

This is great, and as good a place as any for the thread to sprawl from, so I'll ask: it depends on how you know the stock is going to shoot up the next day, right? Trading on private information isn't illegal, and there's a huge variety of ways to acquire private information at varying levels of confidence, and in a sense the purpose of the markets is to aggregate everyone's private information to estimate a price.…

Think the super unsatisfying answer is: ¯\_(ツ)_/¯ I think a lawyer would advise that that trade would come with a ton of risk. But the law isn’t clear. Generally, the SEC’s goal is to make sure markets are “fair.” What makes a market fair is hard to define. If you do a ton of work to launch satellites to fly over Walmart parking lots and then model the correlation of how full they are to what the company’s next earni…

That framing makes a lot of sense, and does help square the difference between the "satellite imaging of Wal-mart parking lots" and "trading on intel you got working bizdev at a tech company".

It's funny how often "we'll trade equities on the information we generate as a byproduct" comes up --- always briefly --- as a tech company business model. Like, I've non-ironically been involved in companies that had that premise, and then "real" business always swamps the "we'll trade on it" intentions.

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