March of Efficient Market

I turned $300k into $2mm in six month. Here is what happened.

After the Enron debacle in 2002, Congress passed the Sarbanes-Oxley Act. One obscure clause in the act required company insiders to report their insider trades electronically within a day. The reports would go into a Securities and Exchange Commission (SEC) database accessible to the public (if they knew how to query the database.)

Prior to that, company insiders had 15 days to report their insider trades in paper format. Those papers would then sit in an SEC library gathering dust. Periodically, a Wall Street Journal (WSJ) reporter would borrow the pile of papers and write a report on them.

As soon as the electronic reporting was implemented, I created a program to query the SEC database in real time. When a company insider sent in his trade, my program would send an alert to my cell phone. In the next 30 seconds, I would call my broker and place a trade in the same direction as the insider. A few days later, when the insider trade finally got to the WSJ, the stock price got a pop and I would sell for a tidy profit. In six month’s time, I turned $300k into $2mm. (Using a spreadsheet, I calculated that at this rate of return I could be a billionaire within three years.)

Then, I found this website. For a mere $20 monthly subscription, anybody could get the insider trade information in real time as well. I actually became a subscriber, just to check out how fast its information was. I found my program was one second faster than the website, but that wouldn’t be enough time for me to place a trade before the information became available to the website’s hundreds of subscribers and the market price began to react.

I called the proprietor of the website, trying to get him to shut it down, or at least delay the information. I let slipped that my program was one second faster. The next day, he called me back to report good news: he went back to look at his code and managed to shave off the second. Needless, he totally killed my golden goose.

I spent the next two years trying to find the next smart idea to make fabulous money. In the process I gave back most of the $2mm I made.

Here is what I learn from this experience. Trying to make a lot of money by having faster and better information than the market (aka smart stock picking, smart market timing etc) is like trying to spot a $100 bill on the floor of the Union Station in NYC before everybody else. Not that you can’t get lucky, it’s just that you can’t consistently make a profit from that.

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