Signals from Trading Volumes of Informed Traders

Do the trading activities of especially informed equity and equity option traders predict stock returns? In the June 2025 revision of their paper entitled “An Information Factor: What Are Skilled Investors Buying and Selling?”, Matthew Ma, Xiumin Martin, Matthew Ringgenberg and Guofu Zhou construct an information factor (INFO) using the trades of corporate insiders, short sellers and option traders. Specifically, they each month for each stock calculate:

• To inform the long side of the INFO factor portfolio, net insider purchases (purchases minus sales).
• To inform the short side of the INFO factor portfolio:
  • Short interest (number of shares shorted divided by shares outstanding).
  • Option trading (total option volume divided by total stock volume).
• For each of these three metrics, assign a rank from 1 to 100, with higher rank indicating higher level of positive private information.
• Average the three ranks to compute an information score.
• Reform 10 equal-weighted (decile) portfolios of stocks sorted by information score, with the INFO factor portfolio long the top decile and short the bottom.
• Hold the portfolios for one month.

They assess the impact of stock trading frictions by assuming costs equal to half the respective effective bid-ask spreads. Using insider trading, short interest and option/stock trading volumes during January 1996 through December 2019, they find that: (more…)