Professors at McGill University and New York University released a study investigating unusual trading activity that occurs before mergers and acquisitions (M&A) announcements. The study looked at trading activity in equity options for the 30 day period prior to M&A announcements. Equity options in approximately 25% of target firms had abnormal trading volumes on a level that was statistically significant, showing that insider trading likely occurred. Abnormal trading was especially common in call options and out-of-the-money options.
The study’s results suggest that insider trading is pervasive. The study states that the odds of observing such unusual trading activity by chance is extremely low – “about three in a trillion.”
The study indicates that the SEC only investigates a fraction of the instances of insider trading occurring in the markets. The SEC tends to focus on cases with large target companies and cases with foreign acquiring companies. The SEC brings litigation much more frequently when the deals are actually seen through to completion – “a withdrawn or rumored deal is about 22 times less likely to be investigated.”