Predict Putin's Next Moves By Tracking Crony Insider Trading

From Bloomberg:

At first glance, President Vladimir Putin's Russia may seem like a traditional rogue dictatorship whose actions are impossible to predict. In reality, it's a crony capitalist state with relatively open markets. That means you can always know what's going to happen slightly in advance by following the financial dealings of insiders.

Two Ph.D. students at Cornell, Felipe Silva and Ekaterina Volkova, recently confirmed that after analyzing Russian stock trades ahead of Russia's annexation of Crimea. In a yet unpublished paper, they show that insiders began selling stocks while outside observers, even sophisticated ones, were still struggling to accept the possibility of an armed Russian attack on Ukraine.

Silva and Volkova's research is based on the concept of probability of informed trading, originally developed in the mid-1990s by David Easley and Maureen O'Hara, also of Cornell. The researchers developed a way to track something they call Volume-Synchronized Probability of Informed Trading (VPIN). Essentially, it's the share of trading orders that are likely made by informed participants or insiders, based on their ability to correctly anticipate a move in prices. If the VPIN value for a stock or index rises sharply compared to an historical benchmark, it means insiders have become a lot more active. That suggests a momentous event is probably coming. The VPIN model predicted the Flash Crash of 2010 two hours before it took place.

Silva and Volkova applied the model to trading in 161 Russian stocks and the RTS index futures between Jan. 6 and April 4, 2014. For the RTS futures, the typical VPIN is 34 percent, compared with 22.5 percent for the E-Mini S&P 500 futures. (That doesn't mean a third of the orders are usually placed by criminals using illegal insider information; VPIN broadly defines "insiders" as people with better information than others.)...MORE