A 100% Legal Insider Trading System is legal is because directors are allowed to purchase and sell shares in their companies provided they do so in a timely manner and disclose their transactions with the SEC. It would make sense that company directors are best placed to evaluate the value of their businesses so the insider trading anomaly has been a fruitful line of inquiry for many researchers over the years.
In 1976, a paper from Finnerty concluded that increased insider purchases led to excess returns of 4.6% in the first six months while insider sales led to excess returns of -2.4%.
In more recent research from Jeng, the authors found that sales did not produce any meaningful results but insider purchases led to annual excess returns of as much as 11.2% over the S&P 500.
However, subsequent research from the Handbook of Equity Anomalies used the same methodology and produced annual returns that were nearly 7% lower between 1978-2005.
Nevertheless, the anomaly still shows grounds for development particularly in smaller cap stocks that are out of the realm of big firms.
In one study from the same book mentioned above, small cap stocks that had seen intensive insider purchases produced excess returns of around 5% in the first month, with most of those coming in the first 10 days.
This is illustrated in the following chart taken from the book:
Most of the return from insider trading comes in the first 10 days. Src: The Handbook of Equity Anomalies. Wiley.
The Insider Trading Trading System & Strategy
There are a number of online resources you can use to track insider trading such as Insider Monkey and SEC filings. You can then go long small cap stocks with strong insider purchases. You need to be quick as most of the return comes in the first few days.
Have fun.
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