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Trading Strategy: Factor Ranking with Insider BUYS
Seong Lee
posted Jul 23, 2015
Using Data Show Q

Datasets tend to be large and there are often times numerous applications for the same set. For example, insider transactions tend to work differently with different strategies for different people. Board members, officers, CEOs, and CFOs can all conduct insider buys - each with its own transaction amount and varying amounts of significance. One board member could purchase, in a single big bang, one million dollars worth of Kraft while the CEO of that same company could roll out an equal amount of purchases through six transactions throughout the year. Does it matter that CEOs are buying? Does it matter what the transaction size is? Does it matter that a company hasn’t had a sell transaction in the past three months?

These are all questions that are relevant for you and there may be different answers for different strategies. While I have my own opinions, the data from 2iQ makes it easy for you to test that for yourselves - but for now, I'll get you started with a simple example.

I’m going to show you a simple strategy for filtering through and creating a trading strategy based off of insider transactions. It uses a scoring system that gives each stock a point based off the following criteria only looking at Insider Buys (The data is sourced from 2iQ). So a stock can receive a point for each of the criteria listed below (specifics are found in the code):

  • Transaction Size – The amount in dollars bought in the transaction
  • Insider Relation – The position of the buyer (e.g. CEO, CFO)
  • Insider Level –The insider level provides a category of the insider relation (Level A: the buyer is on the management board or chairman of the company, Level B: the buyer is upper level management, Level C: the buyer is on the supervisory board of the company)
  • Lakonishok 6 month – The Lakonishok ratio measures the insider sentiment in the company over a period of 6 months. The formula is:
    (6m buying volume-6m selling volume)/6 m aggregated buying and selling volume
  • Relative 3 month performance to SPY – Stock performance > SP500 performance in same date range
  • Insider Buy Count 24m – The number of insider buys within 24 months
  • Price of insider buy close to 52 week high

In addition, how long ago the insider buy occurred is also taken to account through a linear scale. The strategy rechecks each stock’s score daily and rebalances accordingly, taking the top 25 securities by rank (with ranks > 0).

I’m excited to be able to bring you this collaboration so take a look at the strategy and let me know what you think!

For those interested in backtesting this themselves, you can contact [email protected]

Seong

Disclaimer

The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian. In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.

4 responses
Seong Lee
Jul 27, 2015

Here's an alternative backtest that might be interesting. It uses the same scoring system as the first backtest, but doesn't filter out for when the stocks have less than zero points.

I feel like the perspective here is a bit more raw and gives you a better sense of what would happen if you longed any stock with an insider buy.

I'm also considering releasing an event study off of this data. Would love your thoughts on how to approach that (e.g. just insider buys within sp500? all insider buys?)

Seong

Daniel C. Place
Jul 27, 2015

Seong, it says your code has some problems...I can't figure out where..please advise. Thanks!

Seong Lee
Jul 27, 2015

Hi Daniel,

If you'd like to run the backtest please reach out to [email protected] for access to the sample Insider Buys data and replace data_link with the URL he provides you

Seong

Tom Austin
Sep 14, 2015

Seong,

I would be interested in a few versions of studies.
1. Establish a core insider buy and 'net buy' (total buys vs. sales) 'baseline' for all of the core 'top level' execs for a set of companies. We're trying to set up the basics of what buys are simply them exercising options regularly.
2. Look for all the historical occurrences of 1.5 or 2 St dev variations above this baseline (or any 'threshhold value) for a key officer.
3. Build out a 'historical test' to see if such variations have produced 'big stocks' moves in the past (> +-5% above the bench or industry over 30 day period).
4. For those companies and 'key officers' were large moves (up or down) have led to big stock moves, set up a ranking on the people most influential.
5. Rank stocks that have 'most influential' insiders who have been 'most predictive in the past' making key buy (or sell) moves.
6. Go long the top stocks and (short) the bottom stocks.

It would also be interesting to look at new IPO's and heavy net selling. Does heavy net selling by key insiders in the first year after public offering affect future price performance.

This is just the first idea.

Best,
Tom

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The material on this website is provided for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation or endorsement for any security or strategy, nor does it constitute an offer to provide investment advisory services by Quantopian.

In addition, the material offers no opinion with respect to the suitability of any security or specific investment. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as none of Quantopian nor any of its affiliates is undertaking to provide investment advice, act as an adviser to any plan or entity subject to the Employee Retirement Income Security Act of 1974, as amended, individual retirement account or individual retirement annuity, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement or other investor, contact your financial advisor or other fiduciary unrelated to Quantopian about whether any given investment idea, strategy, product or service described herein may be appropriate for your circumstances. All investments involve risk, including loss of principal. Quantopian makes no guarantees as to the accuracy or completeness of the views expressed in the website. The views are subject to change, and may have become unreliable for various reasons, including changes in market conditions or economic circumstances.