CTS owner dominates trading volume

CTS Global [CTS 0.67, up 6.3%; 18% avgVol] [link], the proprietary trading firm owned by the Lee Family, reported that CTS Chairman Edward K. Lee bought 384,000 shares of CTS on the open market on January 13. While irrelevant to Mr. Lee’s 1.8 billion shares, Mr. Lee’s trades on that day accounted for 98.5% of CTS’s volume. 

MB bottom-line: As with any case of insider buying, it’s difficult to jump into the head of the person doing the buying to extract valid signals that could help guide our trading of the stock. The general presumption is that insiders buy when the price is right relative to their unique perspective (complete public and non-public knowledge set), with the inference being, “They’re buying because they think the price is going to go higher from here.” We don’t have any info to dispute this, but that doesn’t mean there aren’t problems with the presumption. What’s the time frame for that potential increase? What’s the risk profile of the insider’s purchase? If the price moves against the insider, he’s in one of the best positions (as the Chairman) to “fix” the price for himself in the future. As a private buyer, if you or I followed the insider and the price moved against us, we’re just underwater and drowning without recourse. There’s also the chance that the insider is buying for other reasons, like pride (to pump the price), or control. If the insider is just pumping his family’s bags, then following the insider could be less risky for the public trader, but only to the degree that the insider maintains his interest in pumping those bags. If the buy is for control (CTS has a relatively large public float that it sold to the public at P1.00/share), then (in my view) it’s actually more risky to follow since the insider buyer is pursuing a non-financial goal and our incentives (as public traders) are not aligned. Regardless of the reason for Mr. Lee’s purchase, I tend to steer clear of stocks that can be so heavily influenced by insider trades. I’m uncomfortable putting my money into something that can be so easily dominated by someone with perfect knowledge. Just a personal preference.

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