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Using Insider Trading as a Signal
Gus Gordon
posted

When an insider buys their company's stock, it often means something. Employees of a company often know better than anyone when that company has something good coming which will translate to a rise in public stock price. If an algorithm could know when some employee of a company bought stock in their company, that algorithm could use that as a buying signal.

The insider trading data is actually available online at EDGAR. Insiders are required to report to EDGAR within two days of buying stock in their company. This data is then made publicly available online. I extracted data about insider purchases from EDGAR for the top 3% of stocks in the dollar volume universe. In my algorithm below, I import the data and buy the stocks with the most recent insider buys over a certain frame. There's a more detailed explanation of all this in the code.

Surprisingly (at least to me), this strategy doesn't do that well. Even after messing around with the parameters, I couldn't find any variations that significantly outperformed the market. Maybe I'm missing something. Give it a try, clone my algorithm, and let me know what you think.

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
Aaron Smith

In the little research I've done on insider buys, I believe it works a lot better if multiple people are buying. This doesn't necessarily just include employees, it could also include hedge funds and other 'insiders.' Insidermonkey.com has some info on their site.

Thomas Musselman

My memory is that some academic confirmed that only some types of insiders' buying worked as a signal: CFOs and CEOs, not other board directors or officers.

Gus Gordon

If either of you are interested, it should be fairly straightforward to modify the algorithm. I linked to my EDGAR parser in the source code here, so you could probably add a few lines, run the script to download the new data, and use that .csv. Maybe I'll try at some point, too.

John Fawcett

Just to make it easier, here is a direct linke to Gus' EDGAR parser code

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.

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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.