Fundamental Investors Following Insider Filings–Beware!

Fundamental Investors Following Insider Filings–Beware!

February 2, 2015 Research Insights
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(Last Updated On: January 18, 2017)

Run EDGAR Run: SEC Dissemination in a High-Frequency World

Abstract:

We use a large recent sample of Form 4 insider trading filings to provide evidence on the process through which SEC filings are disseminated via EDGAR. We find that while the delay from a filing’s acceptance by EDGAR to its initial public availability on the SEC website is relatively short, with a mean (median) posting time of 40 (36) seconds, in the majority of cases the filing is available to Tier 1 subscribers before its availability on the public SEC site. We further show that prices, volumes, and spreads respond to the filing news beginning around 30 seconds before public posting, consistent with some market participants taking advantage of the posting delay. These results raise questions about whether the SEC dissemination process is really a level playing field for all investors.

Alpha Highlight:

A classical image of old-time stock trading: buyers and sellers gather together in the exchange trading floor and bargain loudly until the market clears. Now sophisticated computer algorithms can trade million shares at the speed of light. The common term for this sort of trading is officially known as High frequency trading (HFT).

In this high frequency world, high-speed trading can take advantage of every microsecond! Here is a WSJ article named, “Traders Pay for an Early Peek at Key Data.” The article highlights an interesting situation where HFT clients would pay Thomson Reuters $5,000 a month to access data two seconds before other clients.

It seems that speed matters when it comes to information acquisition.

This paper investigates the role speed plays in the context of insider trading.

Form 4  is the form used by insiders to report their trades. This information is disseminated via the SEC website. The process for information dissemination is outlined in Figure 1.

2014-11-26 10_49_28-SEC DIssemination in a high frequency world.pdf - Adobe Reader

After a public company submits documents, the SEC’s EDGAR system will process the information and then deliver to both the Public Dissemination Services (PDS) and SEC website simultaneously. The PDS are responsible for transmitting the data to paying Tier 1 subscribers.

According to SEC documentation, dissemination to Tier 1 subscribers occurs at the same time or after data are publicly-available on SEC website…

 BUT the paper finds that it is not the case!

Two core questions studied in this paper:

  1. Is there a timing advantage available to Tier 1 subscribers?
  2. If the answer of Q1 is “yes”, then does the timing advantage lead to a  trading advantage?

Key Findings:

1. To answer the first question, the authors obtain 4,782 SEC Form 4 filings samples, and compare their SEC post times and Tier 1 subscribers’ PDS feed times.

The results are striking: more than half (57%) are available to the Tier 1 subscribers before SEC public posting! (see table 4) The mean time to initial dissemination to Tier 1 subscribers is 30 sec, while the mean time to initial SEC public posting is 40 sec.

While the time differences are measured in seconds, these delays mean a lot in a high frequency trading world.

2. The second question asks about the economic significance of this time difference. To address this question, the authors tests market responses to such timing issues, regarding changes in prices, abnormal volumes and abnormal returns. The results show that some traders do take advantage of knowing about the insider purchases in advance of public dissemination.

Changes in prices: Panel A shows that price moves upward for advantaged observations (PDS before SEC) around 30 sec before public posting. While for the non-advantaged observations (PDS equal SEC), the upward shift in price occurs exactly at the time of posting.

Changes in abnormal volumes and returns: Panel B shows similar results in abnormal volume.

2014-11-25 11_42_35-SEC DIssemination in a high frequency world.pdf - Adobe Reader
The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged, do not reflect management or trading fees, and one cannot invest directly in an index. Additional information regarding the construction of these results is available upon request.

Watching insider trading filings without a computer and Tier 1 subscription status? Be careful!


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Definitions of common statistics used in our analysis are available here (towards the bottom)




About the Author

Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.


  • Michael Milburn

    Wes, the question I have about this is why would anyone without the best information trade inside the 30 second window (or 2 second window) that key information is due to be released?

    Ex: You hear stories of a key government report figures due to be released at a certain time. Why doesn’t trading dry up in the minutes prior to the release of this crucial data with the understanding that some people are going to get the data ahead of others?

  • Michael,

    I think some market participants suffer from overconfidence. Many participants THINK they have an edge and trade accordingly. As this research piece–and many others like it–suggests, the competition for an information edge is more intense than many realize.

    As a point of reference, I’ve got a PhD in finance and access to all the computing power in the world. I won’t even attempt to compete on the short-term information arbitrage game. Some of my friends are in the business and they are simply too smart and efficient to beat!

  • Denys Glushkov

    Of course, SEC tends to react reactivly rather than proactively http://www.wsj.com/articles/sec-plans-to-fix-flaw-in-electronic-distribution-system-1419621428