You probably already know how I love to follow the options market to try to pick up on “smart money” trades.
Today, I’ve got an American Greed story that just goes to show you how much shady activity goes on in the market…
This case involves two millennials who devised a plan to use non-public information to make a killing in the options market.
It’s the type of activity I love to expose ——and one of the reasons why I, with the help of some quants, created a customized scanner that helps me detect wild options activity.
Millennials Get Caught For Insider Trading
They only stepped into the wild life for a short time, but now they could be facing hard time.
It just proves that the stereotype we all picture in $3K suits cheersing to their illegal profits from insider trading is not always true.
Sometimes their accomplice is found where you least expect it…. Like the nice manager at your local sushi restaurant like in this case.
From the hot summer of 2019 to that October, Yinghang “James” Yang and Yuanbiao Chen were 2 millennials with a plan. A plan to dabble in insider trading.
Yinghang Yang worked for a well-known stock market index company as a senior index manager since 2018. With his title, Yang often was in on the Index Committee’s discussions.
These discussions would include which companies would make it on or get kicked off the US-based indices.
… Very confidential info that the company took steps to ensure it stayed just that.
Putting a slew of procedures, controls, and ethics policies in place to keep this information safe. While also keeping how many in the know as low as possible.
Despite the company Yang worked for, trying its best to prevent insider trading, Yang was not going to let rules or laws stop him.
So he couldn’t use his own brokerage account, one that his employers required monthly statement copies from.
How The Plan Came About
This was where Yang’s friend Chen came into play. In May 2019, the sushi restaurant manager opened a brokerage account.
But Chen was not simply deciding to finally dip his millennial toes into trading. Like I said they had a plan.
This scheme involved some major insider trading of options, so this required Chen to request options trading to be authorized on his account. He told the brokerage that he had been “trading stocks and options for years.” ── Something that was the opposite of true.
The brokerage required the sushi manager to fill out an Options Trading Agreement where he just lied on paper. Claiming 5 years of trading stocks and 3 dabbling in equity and index options.
By mid-June thanks to his lies Chen was approved for options trading. Mere days later the 2 would kick off their insider trading.
June 24 to October 2, 2019, these 2 were up to their necks in illegal activities.
The 2 colluded on the buying of options for 14 different companies ranging from Etsy (ETSY) to Grubhub (GRUB) to Cars.com (CARS).
Sometimes trading only hours before Yang’s employer announced the company being added to or removed from the index.
You can imagine how much money can be made if you know if a stock will be added to an index. If they knew that information, they can buy call options for the run up after the announcement.
If they knew a stock was going to be deleted from an index, well… they can buy puts.
Needless to say, they were reckless in their trades. Especially when trading with nonpublic info.
Out of the many companies they traded they sold everything but the options for one. Making hefty profits on all but 2 trades.
Now like a lot of idiot insider traders Yang and Chen left a trail a mile long and I will tell you how. ── A little thing called an IP address.
Chen’s brokerage account was revealed to be accessed at several places. Places that included ───Yang’s home. Yang’s work. Yang’s phone. And the restaurant Chen worked at.
And I highly doubt that anyone thought Chen took a field trip to his buddy’s office and just happened to trade with extreme psychic-like precision during his visit.
In fact, most of the trades took place at Yang’s work and home.
Only 2 trades Chen made at work. Trades that came immediately after a phone call with Yang.
In September and October 2019, Chen began to transfer hundreds of thousands of dollars from his brokerage account into his bank accounts.
In early October, Chen received a letter from his brokerage. The brokerage requested Chen fill out a form listing his occupation and source of wealth.
This inquiry set off many phone calls between Chen and Yang.
After all the questions from the brokerage, the duo’s dip into the insider trading lifestyle ceased.
Yang has since been arrested with both the SEC and the FBI pressing charges.
Who knows these 2 under 30 dirty dogs might get to share something else besides a brokerage account ── Like a prison cell.
When it comes to the options market, every trade that goes off must be reported to the Options Price Reporting Authority (OPRA).
That means if you can identify some tells that someone may know something, it’s possible to piggyback off their trade idea and make it your own.
The best part is it’s 100% legal (of course we don’t know who’s behind these trades or what they know).