It would be nice if any old schmuck could hop on E*Trade and profit from any old hunch. But successful trading takes information, and information is scarce. Millions of people around the world get paid to dig up information and trade on it before the hoi polloi does. Big data and algorithms haven't helped matters.
One way out of this bind is making your own new information in the world, which, obviously, you can act on first. If the cost of creating a fact big enough to move a stock is less than both (a) the cost of uncovering existing information, and (b) the potential gains from exploiting that new fact, then it makes sense to go ahead and create that fact. This helps explain all those fake SEC filings for things like Avon getting acquired.
These new facts don't have to be fake, however. Consider the recent bombing of the Borussian Dortmund soccer team in Germany, which killed no one and left one player with a broken wrist. Originally the explosion was blamed on ISIS, but now authorities have pinned it on a Russian-German guy whose only motivation was to build a world that aligned with his portfolio positioning:
The 28-year-old suspect, identified as Sergej W., took out a loan on April 3 worth tens of thousands of dollars in order to finance a bet on a fall in soccer team Borussia Dortmund’s stock price, officials said. The bet included the purchase of 15,000 “put options” in the team’s shares, purchased the same day as the April 11 attack, that would have allowed the suspect to turn a profit on a falling stock price.
This tactic might sound familiar. Back in February we met Florida Man Capital Management, whose president and portfolio manager Mark Charles Barnett devised a scheme to bomb 10 Target franchises up and down the East Coast and then buy the dip when NYSE:TGT suffered an inevitable algo-driven swoon on the bad news. Thankfully the plan failed when his accomplice spilled the beans to the feds.
Even if the bombs had gone off, FMCM's trade was a bit of a gamble. So too were the shorts bought by Sergej W.:
The suspect invested €79,000 ($85,000) in the stock options, which could have brought him a profit of more than €1 million if the team’s share price had plummeted, according to North Rhine-Westphalia Interior Minister Ralf Jäger, the top security official in the state where the attack took place. [...] But on April 12, the first trading session after the attack, Borussia Dortmund stock initially fell but ended the day up 1.7% in line with a broader global stock market recovery.
There is a big lesson here for those who want to blow something up, but only if there's a convincing investment rationale; namely, there isn't a convincing investment rationale for blowing things up. But that doesn't mean there aren't any tradable opportunities in ill-advised acts endangering the public. For instance, one could (but should not) buy gun stocks then shoot up a shopping mall. Or one could (hypothetically) short one's company's own stock then recall 63 percent of the cars it made last year. Or one could bet against a financial product one designed with the intention that it would be sold to rubes then implode. The possibilities are endless!