Watchdogs on Wall Street may need to start following shadows. According to a new investigation from, American investors with insider information completed at least $2.75 billion worth of purchases between 2009 and 2021 via “shadow trades” carried out through strange exchange-traded funds.
Watchdogs on Wall Street may need to start following shadows.
According to a new analysis from academic institutions in Sweden and Australia detailing the newest trick to sneak past regulatory oversight, US investors with insider information completed at least $2.75 billion worth of deals between 2009 and 2021 via “shadow trades” carried out through anomalous exchange-traded funds.
What They Deal in Darkness
First, let’s examine shadow trading. Top executives with insider knowledge shouldn’t trade directly in a company’s shares just before a significant event, such an announcement of an M&A, because it would be too blatant. Instead, they trade shares of rival companies that are likely to be impacted by the news or invest in an ETF that is concentrated on a certain industry that may or may not include the target company.
However, whereas insider trading carries a paltry $5 million fine and a maximum 20-year sentence in federal prison, the legality of shadow trading is far murkier. The first such case in American history is still pending in the courts. Those in power had discovered a cunning technique to further rig the system in their favour, with no legal precedence and no oversight:
- According to a study by the Stockholm School of Economics in Riga and the University of Technology in Sydney, ETF trading considerably rose five days prior to the announcement in 3-6% of situations involving M&A announcements.
- The majority of the billions in shadow trades were carried out through ETFs like iShares Expanded Tech Sector, Vanguard Health, and Vanguard Industrials in the health, technology, and industrials sectors.
The research stated that one might obtain direct exposure to a business’s share price through an ETF “in a vehicle that is more covert than trading the firm shares directly, helping decrease scrutiny from law enforcement.“
A Smart Move: Aside from ETFs, the Securities Exchange Commission will soon develop new rules to restrict the use of the 10b5-1 loophole, another often used method for insider trading. 10b5-1s were created to set timetables for trades far in advance to separate executives from key changes in order to prevent them from trading shares of their companies with the benefit of insider information. Yet executives can easily plan stock-shaking business movements because the plans are frequently kept secret from the general public and simple to change or cancel. Due to this, insider trading is difficult to prove.
In recent years, at least 60% of insider trades were made using this strategy, according to a Wall Street Journal research. The SEC will tighten obligatory disclosure requirements as of April 1 and impose restrictions on when executives can start and change their plans. We have a feeling Wall Street will continue to look for loopholes.