Traders Reacting to Bad News: The SEC versus Goldman Sachs

36 Pages Posted: 19 Sep 2011 Last revised: 15 Mar 2012

See all articles by Ryan McKeon

Ryan McKeon

University of San Diego; In-the-Money Options Trading

Date Written: March 14, 2012

Abstract

On the 16th of April 2010 the Securities and Exchange Commission announced that they were bringing charges against Goldman, Sachs & Co. for alleged fraudulent dealings. In this paper I study the actions which financial market participants took in response to this dramatic, negative announcement. Specifically, I study trading in the stock, bond and options markets for Goldman, Sachs securities to examine the choices that traders made when acting upon the news. I find abnormally high volume in all of these markets. Trading volume immediately spiked in the stock market, but showed a delayed increase in the bond market. Volume in Put options spiked immediately following the announcement, and the evidence suggests that such trading was highly profitable for at least 30 minutes following the announcement, a surprising length of time. Traders also implemented volatility trades in the options market, although evidence suggests that they lost money on this activity. Finally, the announcement prompted unusually large volumes of spread trading in both Call and Put options, with the surprising finding that this volume spike was considerably larger in Calls than Puts. All together, the results indicate huge interest in the part of traders to profit from the announcement, even though its public nature in theory could have precluded profit opportunities.

Keywords: trading, market efficiency, market crash

JEL Classification: G01, G11, G14

Suggested Citation

McKeon, Ryan and McKeon, Ryan, Traders Reacting to Bad News: The SEC versus Goldman Sachs (March 14, 2012). Available at SSRN: https://ssrn.com/abstract=1929003 or http://dx.doi.org/10.2139/ssrn.1929003

Ryan McKeon (Contact Author)

In-the-Money Options Trading ( email )

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University of San Diego ( email )

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United States

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