New York, New York (PressExposure) June 24, 2008 -- Goldman Sachs has done it again, today it reported a second-quarter result that topped analyst expectation. Over the past few quarters, with massive writedowns and various investment banks forced to be restructured, Goldman is one of the very few top tier ibanks that are still able to exceed analyst estimates.
One day before the bank reported the results on June 17, many option traders put their hands around Goldman June CALL options that would soon to be expired on June 20th. The transaction volume of June CALL $175, $180 and $185 spiked, showing investors are confident that Goldman would once again beat the expectation.
But how did these people know in advance? If they had done their researches well in advance, they would have bought the CALL options much sooner. Why would everyone bought the option at the last minute, right before the announcement of results? Most analysts and investors would find these bets on CALL too well-timed.
Insider trading is illegal in the States. It is against the law to use material, non public information to trade. As an investment professional, I have both the moral and legal obligation not to tip off my family and friends even if I know about certain market information that will trigger a sharp jump in stock prices. Ex-Credit Suisse investment banker Hafiz Naseem was sentenced to 10 years in jail for leaking confidential information to his friend.
In 2008, the SEC has initiated 22 insider trading cases, more than the total during the 90s. In the past when exchanges were done by floor traders, it was not uncommon for a trader to notify the market maker (the party that provide option liquidity) for any large, suspicious order.
As market makers, firms are obliged to sell and buy options. Peak6 reported "millions of dollars of loses" due to insider trading.
Where do material, non-public "insider" information come from?
Investment bankers who work on merger and acquisitions would know about probable takeover activities, same for external auditors. Prime brokerage staff at investment bank would also be exposed to hedge fund activities.