Insider Signal Methodology

Scoring SEC Form 3, 4, and 5 filings to distinguish informative insider transactions from routine trading activity.

Overview

Corporate insiders—officers, directors, and large shareholders—have privileged access to material non-public information about their companies. While trading on such information is illegal, insiders often trade based on their general assessment of company prospects. Academic research has shown that aggregate insider trading can predict future stock returns.

Our insider signal methodology transforms raw SEC filing data into actionable intelligence by scoring each transaction based on who traded, what they traded, and how much they traded.

SEC Filing Data Sources

All insider transactions must be reported to the SEC via Forms 3, 4, or 5:

Form 3 - Initial Statement

Filed within 10 days of becoming an insider (officer, director, or 10%+ owner). Establishes the baseline of securities held.

Form 4 - Statement of Changes

Filed within 2 business days of any transaction. This is the primary source of timely insider trading signals. The tight deadline makes Form 4 filings highly actionable.

Form 5 - Annual Statement

Filed within 45 days after fiscal year end for transactions exempt from Form 4 reporting or inadvertently not reported. Less timely but captures small transactions and gifts.

Signal Scoring Formula

Each insider transaction receives a score from 0-100 based on four components:

\text{Score} = (0.30 \cdot R + 0.25 \cdot T + 0.35 \cdot D + 0.10) \cdot (1 - P)

Where:

$R$ = Role weight (0-1): Significance of the insider's position
$T$ = Transaction type weight (0-1): Informativeness of the transaction type
$D$ = Dollar value weight (0-1): Magnitude of the transaction
$P$ = 10b5-1 penalty (0 or 0.4): Reduction for pre-scheduled trades

The final score is scaled to 0-100, where higher scores indicate more informative signals.

Role Significance Weights

Not all insiders are created equal. A CEO buying shares is more significant than a 10% owner selling. We assign weights based on the insider's likely access to material information:

Role	Weight	Rationale
CEO / Chief Executive Officer	100%	Highest decision-making authority, direct control over company strategy
CFO / Chief Financial Officer	95%	Deep visibility into financial performance, accounting, and forecasts
COO / Chief Operating Officer	90%	Operational insight, day-to-day business performance
President	85%	Senior leadership with broad company visibility
CTO / Chief Technology Officer	80%	Product and technology roadmap knowledge
General Counsel	70%	Legal matters, M&A activity, regulatory issues
Officer (other)	65%	Executive-level position with material information access
Director	60%	Board member with fiduciary duty and strategic oversight
VP / Vice President	55%	Senior management with departmental visibility
10% Owner	50%	Large shareholder with significant economic interest
Treasurer	50%	Cash management and capital structure visibility
Secretary	40%	Administrative executive role

Transaction Type Classification

The type of transaction determines both its direction (bullish/bearish/neutral) and informativeness. Open market purchases and sales carry the most signal; gifts and administrative transactions carry the least.

Code	Type	Direction	Weight	Description
P	Purchase	bullish	100%	Open market purchase - strongest bullish signal
S	Sale	bearish	100%	Open market sale - strongest bearish signal
F	Tax Withholding	bearish	40%	Shares sold to cover tax obligations on vesting
A	Award/Grant	neutral	30%	Stock grant or award - company compensation decision
M	Exercise/Conversion	neutral	20%	Option exercise or conversion - often routine
G	Gift	neutral	10%	Gift to family, charity, or trust - tax planning
D	Disposition to Issuer	neutral	10%	Return of shares to company
J	Other	neutral	10%	Other acquisition or disposition

Dollar Value Weighting

Larger transactions carry more signal. We use a logarithmic scale to normalize across the wide range of transaction sizes:

D = \min\left(1, \max\left(0, \frac{\log_{10}(\text{Value}) - 4}{4}\right)\right)

This maps transaction values to a 0-1 scale:

$10K

20%

$100K

40%

$1M

60%

$10M

80%

$100M+

100%

10b5-1 Trading Plan Detection

Rule 10b5-1 allows insiders to establish pre-scheduled trading plans when they are not in possession of material non-public information. These plans then execute automatically, providing an affirmative defense against insider trading claims.

Why 10b5-1 Plans Matter

Transactions executed under 10b5-1 plans are less informative because:

The plan was established in advance, possibly months before execution
The insider cannot modify the plan while possessing MNPI
Timing and size are predetermined, not based on current information

We apply a 40% penalty to signals from 10b5-1 plans. This is reflected in the penalty term $P$ in our scoring formula.

\text{Adjusted Score} = \text{Raw Score} \times (1 - 0.40) = 0.60 \times \text{Raw Score}

Signal Direction Classification

Each transaction is classified as bullish, bearish, or neutral:

Bullish

Open market purchases (P). Insider is putting personal capital at risk, signaling confidence in future prospects.

Bearish

Open market sales (S) and tax withholding (F). Insider is reducing exposure, though sales may be for diversification or personal reasons.

Neutral

Grants, exercises, gifts, and other administrative transactions. These reflect compensation plans or estate planning, not market views.

Aggregated Insider Sentiment

Individual transactions can be noisy. We aggregate across all insiders for a given security to compute net sentiment:

\text{Net Value} = \sum_{\text{buys}} |\text{Value}_i| - \sum_{\text{sells}} |\text{Value}_i|

Bullish Sentiment: Net Value > 0 (more buying than selling)
Bearish Sentiment: Net Value < 0 (more selling than buying)
Neutral Sentiment: Net Value ≈ 0 (balanced activity)

We also track the count of net buyers vs. net sellers over a 90-day window to provide additional context beyond dollar values.

Red Flag Detection

Certain patterns in insider activity may indicate elevated risk:

Cluster Selling

Multiple insiders selling within a short window (e.g., 3+ insiders in 2 weeks) may indicate shared negative outlook.

C-Suite Exit

CEO, CFO, or multiple executives selling significant portions of their holdings can signal fundamental concerns.

Unusual Size

Transactions significantly larger than the insider's historical pattern may warrant attention.

Earnings Window

Transactions close to earnings announcements (within blackout windows) may indicate timing awareness.

Confidence Score

Each signal includes a confidence score (0-100) based on data quality:

\text{Confidence} = 50 + 15 \cdot I_{\text{role}} + 20 \cdot I_{\text{value}} + 15 \cdot I_{\text{type}}

Where $I_{x}$ is an indicator (0 or 1) for whether that data field is present.

Base confidence: 50%
Role specified: +15%
Dollar value reported: +20%
Transaction type specified: +15%

Signals with higher confidence scores have more complete data and more reliable scoring.

Access by Subscription Tier

Feature	Free	Pro	Premium
Insider signals per holding	3	10	Unlimited
Historical lookback	30 days	90 days	1 year
10b5-1 plan analysis	-	Yes	Yes
C-suite activity feed	-	Yes	Yes
Real-time filing alerts	-	-	Yes

Academic References

Seyhun, H. N. (1986). Insiders' profits, costs of trading, and market efficiency. Journal of Financial Economics
Lakonishok, J., & Lee, I. (2001). Are insider trades informative? Review of Financial Studies
Jagolinzer, A. D., Larcker, D. F., & Taylor, D. J. (2011). Corporate governance and the information content of insider trades. Journal of Accounting Research
Cohen, L., Malloy, C., & Pomorski, L. (2012). Decoding inside information. Journal of Finance

Disclaimer

Insider trading signals are derived from public SEC filings and reflect historical transactions. Past insider activity does not guarantee future stock performance. Insiders may trade for personal reasons unrelated to company fundamentals (diversification, liquidity needs, tax planning). This analysis is for informational purposes only and does not constitute investment advice.