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Matthew A. Winkler

To Sniff Out Insider Trading, Follow the Options Market

How algorithmic sleuths use artificial intelligence to expose suspicious activity related to mergers and acquisitions.

Somebody knows something.

Somebody knows something.

Photographer: Greg Wood/AFP/Getty Images

Insider trading involves illegal profiting from nonpublic information by people buying and selling shares. It typically increases whenever companies are busy acquiring each other. The 42 percent rise in the Russell 3000 index during the 24 months through September included the most mergers and acquisitions in 12 years. Now the technology that created artificial intelligence is getting good at detecting stock market fluctuations that can only be explained as abnormal, sophisticated and nefarious.

Bloomberg algorithms give market participants help identifying unusual activity in stock, bond, currency and derivatives trading. The automated analysis of derivatives like options can also expose otherwise opaque insider trading activity that was once evident only with the fluctuations of the underlying assets of bonds, commodities, currencies and equities.