Taleb's point seems more to be that he saw a mispricing and traded on it one day, rather than anything profound regarding option pricing, unless I am missing something. Anyway, it has little to do with what's being said in the article.
I guess because the article is talking about insider trading through the use of options and your point on Taleb is how he traded options like any option trader would.
I should be clear that what you seem to think ties these together, i.e:
> given the volatility, at least one would be a hit in this month.
I don't actually believe to be true. It's not like these options aren't being priced somewhat accurately. There could be insanely high volatility and all that needs to happen is for the price to go up instead of down for none of your options to "hit."
A relevant aside: surely insider trading is happening all the time? There are so many daily market-shifting events involving so many privy parties that it seems inevitable to happen every few minutes (not defending the actions in the article).
How many physicians have been able to get rich from learning a CEO will be out of commission? In that case, I'm not even sure whether it would be considered insider trading.
How does one even go about accusing someone of insider trading? The illegality sounds pretty unenforceable.
>How many physicians have been able to get rich from learning a CEO will be out of commission?
Do you actually have an answer to that? Or are you just throwing out an unanswerable question as some form of “gotcha”?
Now I’m actually curious. There aren’t _that_ many publicly traded companies; only about 4,000 according to Google. A little over 9,000 IPOs since 1980 [0].
The number of companies where the CEO being “out of commission” on such a short timescale would generate “rich” (to me, in this scenario, >$5 million) levels of ROI has to be pretty low up. Probably not even most of the Fortune 100. Then the number of doctors who have that info and are going to act on it is a smaller fraction. Then the three have to match (command that fits + ill CEO + trading physician).
Do you think it’s over 10? 25?
Never in a million years would I have guessed that there have only been 9000 IPOs in the last nearly half-century. Really drives home how many US businesses are privately owned.
It is surprising that it's such a small number, but upon reflection maybe not so surprising. Stock markets were invented to allow massively capital intensive businesses like railways to get off the ground. You can't grow a railway organically by reinvesting profit like a regular business; it needs to be fully built before it can bring in a penny. Naturally there can only be so many of these businesses. In the case of railways they usually become natural monopolies. So being publicly owned was a really great thing.
But most businesses don't need such large capital injections anyway. They can grow organically, and there's very little reason to sell a profitable company. Although it does happen, of course, Google being a prime example, having gone public when already profitable.
It looks like they were only looking at the NYSE and Nasdaq. Smaller companies would not qualify to trade on those exchanges, they would trade over-the-counter. There are more OTC stocks than there are that trade on NYSE/Nasdaq.
"The sample is composed of the IPOs of U.S.-based companies with an offer price of at least $5.00 and listed on the NYSE (excluding NYSE American and NYSE MKT issues after the merger in 2008) or Nasdaq (excluding Nasdaq small cap issues before October 2005 and, after Sept. 2005, Nasdaq capital market issues), excluding ADRs, unit offers, SPACs, closed-end funds, REITs, partnerships, banks and S&Ls, and stocks not listed on CRSP (CRSP includes Amex, NYSE, and NASDAQ stocks)"
I agree with you that it's possibly unanswerable, which is more or less the point. The broader idea is that there are lots of obscure interactions like that one I made up.
You can switch up the doctor and CEO patient for anything else. Bankers, lenders, family friends, former professors ... An unbounded number of humans that can come into contact with useful info to trade on. What do we think are the magical constraints that prevent them from doing so? Corporate etiquette?
The ROI will obviously be a function of what information is passed. But I think that I'm more interested in understanding how often it happens rather than that any one case is "low ROI". It is interesting to consider whether it's the ROI threshold that should philosophically make/not make something insider trading.
Isn't it literally all included in this umbrella section?
> Friends, business associates, family members, and other "tippees" of such officers, directors, and employees, who traded the securities after receiving such information;
But not only the physicians know a CEO will be out of commission. And there are many more cases where a CEO will leave a company without being ill.
And there are much more situations that will influence stock prices than a company changing its CEO. Those situations can be both internal and external to a company.
So I think we potentially have thousands or tens of thousands of people who learn information that make them rich if they act quickly. And even that has a multiplying factor since those people have friends and family.
"Hey Bill, wanna make a quick buck? As soon as market opens buy XYZ. You don't know it from me and I didn't call you today."
Also, most of the situations you are describing are not insider trading. If Warren Buffett calls his secretary and tells them he needs to go to the hospital because he’s having a heart attack, and they short BH on the way, that _could_ be considered insider trading. If I’m a nurse at that hospital and I’m on break outside and watch Buffett being wheeled in on a gurney and I trade on that, that would generally not be.
Insider trading in the US is more about misappropriating information that belong to a party you have fiduciary duties to, not so much about harm to the public.
For example, imagine you are working for Warren Buffet and you learn that he has quietly bought some stocks and next weeks he's going to announce that. Assume that this announcement will reliably make the stock trade up. If you trade on that information, that's insider trading by US laws.
However, now imagine that you are Warren Buffet. You just quietly bought some stock, and you plan to announce that fact next week. If you trade on that information about your intentions, that's not insider trading by US law: you are allowed to trade on your own private intentions and information.
Notice that from the point of view of the anonymous counter party trading with you on the stock exchange, both situations look exactly the same.
That's an illustration that insider trading law in the US is not supposed to protect the public. (At least not originally.) So making insider trading legal in the US wouldn't make the general public any worse off.
Of course, IANAL applies. The above explanation is mostly paraphrased from Matt Levine's Money Stuff.
Insider trading around Warren Buffett seems like a really odd example. More typical would be company employees knowing the quarterly results before they are published. And there, it's easy to see how the law is protecting the public by leveling the playing field.
Technically the law is protecting the share holders. Legal scholars, regulators, and even judges have continually tried to push the fraud-on-the-market theory of insider trading, but IIRC it's been firmly rejected by SCOTUS multiple times. There are statutes where the fraud-on-the-market principal pertains, but for your typical insider trading case predicated on Securities Exchange Act jurisprudence, it doesn't fly. Courts have said it would sweep far too broadly and significantly expand the scope of criminal liability (e.g. end up in prison for trading on something you overheard at the coffee shop). As insider trading law has been largely constructed by the courts (the statute its rooted in says nothing about "insider trading"), Congress would have to be explicit about a further expansion of criminal liability.
Yes. And there's also no bans on equivalent 'insider trading' for foreign exchange nor commodities. And markets in these work just fine.
Some economists suggest that insider trading is good for public markets, because it disseminates information. (However fiduciary duties would still apply. But they would only allow the company to sue the vice president who told her golf buddy about the upcoming earnings, but could not sue the golf buddy.)
>That's an illustration that insider trading law in the US is not supposed to protect the public.
From [0]:
>Because insider trading undermines investor confidence in the fairness and integrity of the securities markets, the SEC has treated the detection and prosecution of insider trading violations as one of its enforcement priorities.
> Notice that from the point of view of the anonymous counter party trading with you on the stock exchange, both situations look exactly the same. [...] So making insider trading legal in the US wouldn't make the general public any worse off.
Eh? If nothing else, doesn't it magnify the public's risk beyond whatever impact Buffet could have on his own? How can you possibly claim there is no difference?
You might as well say: imagine you secretly give another country nuclear weapons, and assume that that country plans to use them. Now imagine you plan to use them for the same purpose yourself. From the viewpoint of the public, the situation is exactly the same. So nuclear proliferation wouldn't make the general public any worse off.
Or imagine the president picks a random person by lottery every day to run the country while he goes to play golf. The president can take the same actions himself, so from the standpoint of the general public, nobody would be worse off.
> Eh? If nothing else, doesn't it magnify the public's risk beyond whatever impact Buffet could have on his own? How can you possibly claim there is no difference?
Let me be more explicit: Warren Buffett usually doesn't physically execute his own trades. So the only difference between the two scenarios I outlined is that in the second one Warren Buffett tells you (as his employee) to trade. In the first one, you trade without him telling you to do so.
But it's the same person doing the trades in either scenario.
> Or imagine the president picks a random person by lottery every day to run the country while he goes to play golf. The president can take the same actions himself, so from the standpoint of the general public, nobody would be worse off.
If you have clients, now would be a good time for you to become very curious about something called "the principal-agent problem," rather than wait till some prosecutor mentions the phrase before a dock in which you, if permitted a chair, are sitting.
You completely missed the point. It had nothing to do with who is executing the trades.
>> If nothing else, doesn't it magnify the public's risk beyond whatever impact Buffet could have on his own?
I am saying that when you let others pull the same trick in addition to Buffet himself, they can now bring their own additional funds to play with -- meaning they can make more trades and cause even more damage than Buffet could inflict on his own. This clearly enlarges the blast radius and allows more harm to the public than Buffet could cause with his own funds. It is ludicrous to close your eyes and suggest the situation is no different, just like it is by suggesting that there's no difference between one country having nukes vs. N of them having them.
Heck, the fact that Warren Buffet is used as the example here instead of some random John Doe makes it clear how intentionally ridiculous the example is: for this to even pass the laugh test and obscure the reality of the situation, you have to pick one of richest people of all time, so that even aggregating a thousand other random strangers' funds together would still miss his purchasing power by multiple orders of magnitude.
Why don't you start with someone poor instead of Buffet, then add Buffet to the equation, then try to claim that bringing the billionaire into the equation makes no difference, rather than the other way around?
> I am saying that when you let others pull the same trick in addition to Buffet himself, they can now bring their own additional funds to play with -- meaning they can make more trades and cause even more damage than Buffet could inflict on his own.
Buffett is not inflicting damage on anyone by trading on his intentions. Neither would anyone else.
Also: the typical 'insider' in insider trading cases has far less budget to bring to bear than the typical principal. Eg Warren Buffett (and Berkshire Hathaway) are richer than Warren Buffett's assistant.
Also: 'insider trading' is perfectly legal for commodities and foreign exchange, and the markets in these work perfectly well.
> Why don't you start with someone poor instead of Buffet, then add Buffet to the equation, then try to claim that bringing the billionaire into the equation makes no difference, rather than the other way around?
I'm very poor compared to Warren Buffett. If Warren Buffett wanted to trade on any information I held, I'm very sure we could work out a deal.
Well if CEO X and his deputy Y pass me on the street and they are overly excited or overly depressed, and I overhear what they talk and I buy some options, does it mean I break the law?
It has been estimated 25% of stock market trading is some sort of insider trading. However 1) it depends where you draw the line what's insider information and what not 2) not all of these trades all profitable.
Due to insider trading rules being problematic, sometimes more headache than benefit, the UK FCA is now allowing new stock market to launch where insider trading is legal.
> How does one even go about accusing someone of insider trading? The illegality sounds pretty unenforceable.
Much of it is data analysis. My favorite examples of this are actual hacks - once foothold is established instead of encrypting & ransoming, the attacker just listens to the CEO/CFO. One hacked a law firm that handled some sizable mergers.
Personal tangent: Once had an opportunity to insider trade on a particular huge aerospace company. Playing a squad-based PvE game, matchmade into a team with 3 real-life friends at said company who chatted on in-game voice comms about their day, talking about court cases and senate hearings, and later panicked when they realized I could hear it all. They were nice guys, and I assured them that I wouldn't misuse what I overheard - I don't work in a relevant industry, and my investments do just fine without an illegal edge (plus I know Matt Levine's Laws of Insider Trading #1: Don't).
I doubt it.. I suspect that most of us would trade just as poorly if we knew Q results ahead of the announcement :)
Because it maybe up a bit or down a bit, but that's all going to measured relative to assumptions the market has and those assumptions aren't public either.
Even as a math graduate, I still think calculus is a bit weird.
The idea of successive approximations for a slope culminating in a dy/dx term -- where we say dx (really the denominator of the limit definition) is obviously not zero, but is also smaller than any given real number. It's not clear that numbers should work like that.
Pile on that calculus courses (at least in the US) tend to care more about deriving interesting trigonometric/exponential/polynomial/whatever derivatives once using the limit definition and proceed to have students essentially memorize the derivation tricks for the remaining 90% of the course, and it can easily end up being overwhelming.
That does seem a bit pointless. If that's your first experience of calculus I can see it would be off putting. Here in the UK basic calculus is taught at school, it felt just like another aspect of maths to me.
Isn't this also related to how the vaccines-cause-autism conversation started? The study involved only had a handful of subjects (a few of which were very unqualified), and then a big important journal (The Lancet IIRC) picked it up for the novelty.
The article mentions attention economy as in media, TikTok, etc playing a role before "community assessment." But it's not like scientists don't also gravitate towards the new shiny thing in their own ways.
Yeah. Andrew Wakefield was stripped of his medical license in 2010 for publishing fraudulent research and it was later discovered that he was paid to discredit the MMR vaccine.[0]
And yet, ~10% of Americas still believe the study. [1]
In the linked study, 10% said they believed vaccines caused autism, and while they were not asked whether they accepted Wakefield’s claims, presumably just about all who did were included within that group. 45% said they were unsure, leaving open the important question of which way they would go when faced with a choice.
In the linked study, 10% said they believed vaccines caused autism, and while they were not asked if they accepted Wakefield’s claims, presumably just about all who do were in that group. 45% said they were unsure whether vaccines caused autism, leaving open the important question of which way they would go when faced with a choice.
Besides looking at other industrialized countries, it also insightful to look at the health outcomes of the us against other Caribbean and African states, particularly in the places where most of the Black women in the us live.
In 2019, the reported maternal mortality rate (MMR) for Black women in the US state of Georgia was 66 / 100,000.
Barbados MMR of 12.6 / 100,000.
Bahamas, MMR of 22.4 / 100,000.
Zimbabwe, MMR of 53.9 / 100,000.
Botswana, MMR of 45.9 / 100,000 (the MMR of white women in Georgia)
Jamaica, MMR of 13.7 / 100,000.
Cuba, MMR of 5.1 / 100,000
“Of note, black mothers who are college-educated fare worse than women of all other races who never finished high school. Obese women of all races do better than black women who are of normal weight. And black women in the wealthiest neighborhoods do worse than white, Hispanic and Asian mothers in the poorest ones.”
It’s hard to separate that from the US’s nasty combo of outlier poverty + healthcare that’s non-free at the point of service. Doesn’t bode well for populations disproportionately in and near poverty…
But (to be fair and balanced) one pro of the US’s system that other countries don’t have is that black and white people (and all other races) are allowed to use their HSAs as a tax shelter for their investments.
Ya I was just making a little joke about the US's right-wing solutions for distributing healthcare, and "equality of opportunity" arguments people make.
IRL some of the poorest people I know have been screwed over by attempting to use similar programs.
Myself, I really don't want to have to fucking rebalance my healthcare portfolio. As opposed to, y'know, just walking in the building, getting my healthcare, walking out, and squaring up at tax time on a progressive curve.
Sorry! I was trying to save the user scanning time by calling attention to a particular fact about the article, but I can also just use the text box to do so. Thanks!
A simply-stated conjecture in graph theory involving the reconstruction of a graph with N vertices from a collection of the N subgraphs that result when a vertex is deleted.
I studied Gambler's Ruin while taking probability as an undergrad (and studying to land a quanty job after college). For folks who enjoy these types of puzzles, another similar exercise that I spent an entire afternoon trying to solve was the following:
You have 52 playing cards (26 red, 26 black). You draw cards one by one. A red card pays you a dollar. A black one fines you a dollar. You can stop any time you want. Cards are not returned to the deck after being drawn. What is the optimal stopping rule in terms of maximizing expected payoff?
Of course we should continue if the current score is lower than ev. Here is the script to find exact thresholds at which we should stop drawing more cards:
def find_thresholds():
print(f"EV of tha game: {ev(0,52)}") # fill the cache up
for i in range (0,10):
thres = 52 - i
while ev(i, thres) > i:
thres -= 2
print(f"At score {i} you should stop drawing with {thres} cards left")
>>> find_thresholds()
EV of tha game: 2.6244755489939253
At score 0 you should stop drawing with 0 cards left
At score 1 you should stop drawing with 3 cards left
At score 2 you should stop drawing with 8 cards left
At score 3 you should stop drawing with 17 cards left
At score 4 you should stop drawing with 28 cards left
At score 5 you should stop drawing with 41 cards left
At score 6 you should stop drawing with 46 cards left
...
Being up 6 or more we should always stop. The last interesting number is being up 5.
From some quick "just several minutes" beer-laden kit bashing in my brain:
1. Draw 26 cards.
2a. Equal to or greater than $26? Stop.
2b. Less than $26? Draw 13 more cards.
3a. Equal to or greater than $1? Stop.
3b. Equal to or less than $0? Keep drawing until equal to $0, then stop.
I'm assuming I want to always stop at a non-negative value, else I'd pay the house on the way out. If ending with a negative value has no consequences beyond the game itself, then just stop at 2b after drawing.
Looking back, I think I got my numbers mixed up (thanks, beer!). $12 or $13 is probably the number I'm looking for, not $26.
Anyway, my logic is if I am at or higher than the median after I have drawn half the deck, then that means there are more black cards than reds in the remaining deck and I have a greater chance each draw of losing a buck than gaining.
So it is in my best interest to pull out at that point, than to try my luck against ever worsening odds.
For the same reason, you’d never intentionally stop at $0 (unless the deck is exhausted). You can always get back to $0 by drawing the rest of the deck, and there’s a 50% chance of going up a dollar on the next card.
The EV to drawing another card is going to be tied to the probabilities of continued random walks eventually landing on higher scores than you currently have. You stop as soon as the EV is negative (or 0 if you’re not a gambler).
That calculation is presumably the tricky part… integrating over Pascal’s Triangle or something. But it must be positive to start: If the first card is red we have already gained, and if it’s black we’re at worst back where we started.
This reminds me how I was introduced to this topic, the St Petersburg paradox. It was after a discrete 2 final. The professor heard us talking about a competition from our Quant finance club and decided to ask us this problem. Essentially asking the same thing but with a dice, so with replacement, with bigger values and asking what logic our stop algorithm would be to maximize our return. And what would happen if the gain and loss weren't equal with something like +4,+3,+2,-1,-2,-3 as well aas with -4,-3,-2,+1,+2,+3. We ended up staying an extra 2 hours discussing it.
Taleb's point seems more to be that he saw a mispricing and traded on it one day, rather than anything profound regarding option pricing, unless I am missing something. Anyway, it has little to do with what's being said in the article.