The Surprise Index: Insider Trading Flags Explained

The Boardroom Alpha platform tracks all insider trading activity across every US public company and insider. Given the, at times overwhelming, flow of insider activity, Boardroom Alpha's powerful insider trading analytics help you figure out which trades are more interesting and which are less.

Individual Insider Trades

Surprise Index

• This is an overall assessment of how interesting we think this particular trade is. The maximum value is six and the minimum is zero.

• The Surprise Index is based on the six metrics below, all of which have a value of 1 or 0, and it is a sum of all of these values.

• On average, most trades have a surprise index value of ~2.5 plus or minus 1.5. We only display individual surprise index values at the top level for trades with a Surprise Index value of 4 or more.

  • Collective trade clusters include trades with Surprise Index values that are less than 4. This will be explained further below.

Non-10b5

• This is a simple indicator if the trade was marked as being part of a 10b5-1 trading plan on the Form 3/4.

• If the trade is NOT a 10b5-1 trade, we consider that to be “of interest” for the purposes of finding surprising/opportunistic trades.

• Because we don’t know the underlying trading plan, we don’t consider the presence of a 10b5-1 indicator to be sufficient to say that the trade is NOT surprising or opportunistic.

First Trade

• This indicates whether this is the first trade in past 4 years.

• We consider this to be notable because if a person hasn’t traded and then suddenly decides to trade, that’s a notable change in behavior.

• We believe that this captures something distinct from the Notable Intertrade Period indicator, described below.

  • This indicator is more about picking up the change in behavior for someone who has been “silent” on the company from a trading perspective.

  • Notable Intertrade Period is about capturing a change in behavior for regular/frequent traders.

Non-Routine

• This is an implementation of a “Routineness” algorithm and is intended to capture deviations from annual trading patterns.

  • For example, in well-governed company, trades are usually conducted after annual/quarterly meetings or on some other schedule.

  • We want to make sure that, regardless of other indicator values, that these annual trades are not penalized because it represents “good” insider behavior

  • Thus this indicator is more about NOT additionally penalizing regular trades than it is about identifying unexpected trades.

Material Value

• This is an indicator of the relative value of the trade, relative to the trader’s history of trades at the company.

• The value itself might actually be quite low in absolute terms, but if it is high compared to that person’s previous trades it could be an indication of an underlying change in that person’s outlook on the company.

• This indicator is one-directional, in that we only care about uncommonly large trade values rather than uncommonly small values.

Material Share Amount

• This is an indicator of the relative number of shares in the trade, relative to the trader’s history of trades at the company.

  • This is very similar to the material value metric, it just uses a different input value with the same calculation.

• There is certainly some overlap with what this captures and the Material Value indicator, but we think there is still some value in capturing something that is related to individual share price.

  • For example, in a case where a trade does NOT have a Material Value but DOES have a Material Share Amount, that indicates that the share price dropped but there was no change in the person’s trade behavior.

  • So in this case, the absence of a behavior change in response to changing market conditions is notable, perhaps indicating a disconnect between market sentiment and insider sentiment.

• This indicator is one-directional, in that we only care about uncommonly large share amounts rather than uncommonly small values.

Notable Intertrade Period

• This indicates whether a particular trade was made after an unusual period of time relative to the previous trade for a specific insider.

  • For example, if a person trades every day and has been doing so for years, and then there is a gap of a week before trades resume, that is a notable deviation in behavior. (Why did they stop such a regular pattern?)

  • Or if a person trades about every 90 days and then a new trade is 30 days after the previous trade, that is also a notable deviation.

• This indicator is two-directional, in that we care about significant deviations above or below the average intertrade period.

Collective Trade Clusters

Collective trade clusters attempt to find groups of trades at the same company that are interesting when taken together, even if none of the individual trades that comprise the cluster are interesting when taken alone.

A “cluster” of trades is based on time, so a cluster of trades is a group that occurred around the same time. The time period is dynamic, in that a cluster can occur over many days or all on the same day.

We consider a cluster interesting if the trades that make up the cluster have an interesting deviation in the aggregate of one or more of the component metrics from the average of all trades. The idea here is that a randomly selected group of trades would have aggregate metrics that are roughly the same as the overall aggregates, and that a deviation from a non-random sample is notable.

For example, if on average, 20% of trades are for a Material Value, we’d expect a random sample of trades to have approximately 20% Material Value. If the trades in a cluster significantly exceed this value, then perhaps there is something interesting going on in this particular group of trades.

We consider a cluster interesting if ANY of the following indicators shows a deviation from the average of all trades for that indicator.

• Average Surprise Index

  • Somewhat obvious, but this is the average surprise index of the component trades. A cluster is automatically considered interesting if it has a high average surprise index.

• % Non-10b5

  • Does this cluster have an uncommonly high percentage of trades that are NOT 10b5-1s?

• % First Trade

  • Does this cluster have an uncommonly high percentage of trades for the first time in 4 years?

  • Why would people suddenly make a trade after doing nothing for such a long time? What occurred that caused these people to stop being silent?

• % Non-Routine

  • Are an uncommonly high percentage of trades not part of an established trading pattern?

  • Why would insiders deviate from an established pattern in concert?

• % Material Value

  • Are an uncommonly high percentage of trades for larger than average values?

  • It may be that the component trades in the cluster have a wide range of values, or that the average value doesn’t seem to be for a high absolute amount. This is because all values are relative to each trader’s history. What is material for one insider may not be material for another.

• % Material Share Amount

  • Are an uncommonly high percentage of trades for a larger than average number of shares?

  • This has a similar logical basis as the % Material Value condition.

• % Notable Intertrade Period

  • Do an uncommonly high number of trades in the cluster have a significant deviation from the trader’s typical trade frequency?

  • If many insiders decide to deviate from an established pattern, why? What might be causing that mass deviation?