In a study published last week by a NYU professor and one from McGill University, they found that after reviewing trading activity in equity options before M&A announcements from January 1996 through December 2012, 25 percent of the deals had some sort of unusual activity taking place 30 days before the deal announcement, reported Reuters.?
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Highlights from study included the following:
- “The probability of option volume on a random day exceeding that of our strongly unusual trading sample is trivial – about three in a trillion.” ?
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- “Informed traders are more likely to trade on their private information when the anticipated abnormal stock price performance upon announcement is larger and when they have the opportunity to hide their trades due to greater liquidity of the target companies.”
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Many of these cases will not be detected and the SEC has litigated only about 4.7 percent of the 1,859 M&A deals included in the sample.
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“According to our discussions with the regulator, the SEC, being resource constrained, pursues larger-sized cases that provide the biggest ‘bang for the buck’ from a regulatory perspective.”
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“The large number of (SEC) investigations for stock trades relative to option trades stands in contrast to our finding of pervasive abnormal call option trading volumes that are relatively greater than the abnormal stock volumes.”