Leak by S&P selection committee helped a stock front-runner? It's a good thing.

Leak by S&P selection committee helped a stock front-runner? It's a good thing.

Martha At roughly 3:45pm last Thursday, just 15 minutes before the market closed, someone sold tens of thousands of GOOG put options between the strike prices of 480 and 500. The previous open interest for those options was pretty much zero, but all of a sudden someone decided that moment was the perfect time for one of the largest and strangest options trades in the history of Google as a public corporation.

After the market closed, the S&P committee anounced Google's addition to the index, and the stock jumped 35 points instantly. And the person who sold those puts just made around 60 million dollars, instantly.

It doesn't take a genius to realize that information from inside the S&P committee got into the hands of someone who acted upon it in a very, very big way. The best part is- even if it were the committee chairman himself who made the trade, it is perfectly legal because he is not technically an insider at Google. It'd be just like the standard industry practice of a brokerage firm buying up shares of a stock before issuing a public buy recommendation. But the S&P is supposed to have a little more integrity than your average pump-and-dump brokerage. Front-running the S&P selections would be about as morally reprehensible as Enron purchasing energy futures minutes before ordering power generating plants to shut down "for maintenance," causing blackouts and those same energy future prices to skyrocket. At least in my opinion.

In case people think this sort of thing is just conspiracy talk, perhaps you should read this article about the professor who runs the University of Michigan Consumer Sentiment Survey. It turns out that he has been front-running his own survey for over 6 years, making millions of dollars trading on his "insider" information about the results. He was exposed back in 2003 and for a while it looked like he might lose his job and face civil penalties, but then his lawyer calmly explained that front-running is not illegal unless you're an actual insider of the company who's stock you are trading, or get information from a person who was an insider. He kept his job, and to this day continues to front-run his survey results for massive profit.

On the other hand, the SEC spared no expense and left no stone uncovered trying to prove that Martha Stewart *might* have scammed 60 thousand bucks in the markets based on insider information. But will they investigate this huge GOOG options trade? Not a chance in hell. Martha was a scapegoat, designed to make middle America think that the SEC was actually serious about cleaning up corporate corruption. After all, the propaganda went, if the SEC had the balls to put such a famous and wealthy woman in jail, then OBVIOUSLY they would do the same thing to any other executive in a heartbeat. All the little investing sheep could feel happy and warm knowing that corruption on Wall Street had finally been shut down forever. But of course, the really big crooks in the market were just given a green light that it was business as usual again.

It would be nice to have the S&P make some sort of official statement on whether or not they allow their selection information to be used for market trading in advance of their announcements, or if they deny it ever happens. I wouldn't hold my breath waiting for their response, though.