Can Language Models Identify Shadow Trading Targets? An NLP Evaluation of SEC Enforcement Theory
Authors: Sarah Wilson, Michael MacKay, Anthony Marello, Trinav Bhattacharyya
Abstract
Shadow trading -- trading in a peer firm's securities on the basis of material nonpublic information (MNPI) about an "economically linked" company -- is a novel and contested theory of insider trading liability, first prosecuted in SEC v. Panuwat (2023). Enforcing it requires identifying economically linked firms ex ante, a determination the SEC makes only after the fact using mass market surveillance infrastructure. We ask whether NLP can do what the SEC's theory presumes insiders already know: identify peer firms ex ante from publicly mandated disclosures. Using a two-stage LLM pipeline applied to Item 7 (Management's Discussion and Analysis) sections of SEC 10-K filings, we score semantic similarity across 30 M&A events spanning five industries and relate similarity to announcement-day abnormal stock returns. On the Panuwat fact pattern itself the pipeline recovers Incyte among the closest peers, a sanity check on the one case with a known outcome. Across the full dataset, however, we find no association: pooling 217 peer observations, the within-event rank correlation between similarity and abnormal return is +0.07 (permutation p = 0.37), and the mean per-event Spearman correlation is +0.05 with a 95% confidence interval of [-0.08, +0.18] -- narrow enough to exclude any moderate relationship rather than merely failing to detect one. A case-level reading agrees: 14 of 30 events support the hypothesis, 12 contradict it, and 4 are ambiguous. We also find that Incyte fell outside the standard $2B-$10B mid-cap band on the day before the announcement, complicating the "mid-cap oncology" category the SEC invoked. These results are exploratory and bound to this pipeline, corpus, and return measure, but they put pressure on the empirical premise of shadow trading enforcement and bear on constitutional questions surrounding the SEC's financial surveillance infrastructure.
Financial NLP has a standard workflow: validate a sentiment tool against human labels, then trust it to extract market signal. This assumes the two evaluations measure the same thing. We test that assumption in a setting where both can be measured at once: a corpus of securities class actions (2002-2025) linking 70,500 X messages to abnormal stock returns, with a single-annotator human labelled gold sample. Running five instruments (VADER, Loughran-McDonald, FinBERT, Twitter-RoBERTa, and an LLM annotator) through one identical pipeline, we find that the relationship between construct and predictive validity depends on the sampling convention and score representation. Under conventional method-specific sampling, human agreement aligns more closely with graded same-day associations than with one-day leads. On a fixed-n panel, however, agreement has similar graded rank correlations at both horizons, while the coarse ordering remains weak. Benchmark agreement therefore establishes semantic validity but does not by itself determine predictive rankings. In a conversation that is 17.6% spam, message volume predicts neither market damage nor settlement size.
AS Aravinthkakshan, Laven Srivastava, Harsh Nandwani
High-dimensional dense text embeddings and large language models face real obstacles in financial-disclosure analysis: context-window limits, hallucination risk, high computational cost, and the arbitrary rotation of vector spaces across independently trained models. We present a training-free, alignment-free framework for corporate intelligence built on deterministic sparse seed vectors. Hashing word strings into a fixed high-dimensional basis places all documents and all temporal epochs in a common coordinate system by construction, removing any need for training or alignment. Accumulating these seed vectors across sentence contexts yields corpus-specific semantic signatures that compose linearly, supporting sub-second document comparison, issuer fingerprinting, tracking of how an issuer's vocabulary shifts between filings, and thematic sentence extraction, all on ordinary CPU hardware. Demonstrating the approach on a multi-year corpus of SEC filings (10-K, 10-Q, 8-K), we show how material corporate events, among them Boeing's 737 MAX crisis, Intel's supply-chain disruptions, and Bunge's acquisition of Viterra, emerge as distinct, interpretable semantic profiles, each traceable to the exact source sentences that produced it, with no domain-specific training and no LLM inference.
Existing financial NLP benchmarks often rely on labels supplied by outside observers, measuring how language is perceived rather than what speakers have committed to in the market. We introduce StakeBench, an evaluation framework for language understanding grounded in market commitment. StakeBench links 560,876 comments from 2,261 resolved markets to verified position, action, and market-odds records across Polymarket and Manifold. Supervision is derived from observable market behavior. Position sides, post-comment trading actions, and market-odds trajectories replace human annotation. Four diagnostic tasks test whether models detect market commitment, identify the revealed side, anticipate future action, and perform collective odds projection. Three commitment-aware metrics measure alignment with revealed preferences rather than perceived sentiment. Validity audits and explicit interpretation boundaries help distinguish observable commitment signals from latent belief and causal market-odds impact. Across 15 LLMs and 18 topics and platform settings, models partially recover position-side signals, with Directed Accuracy from 0.506 to 0.599, but show structural failures on later tasks. Ten of the fifteen models collapse to one or two action labels in future action anticipation, and no model consistently improves on the naive odds-direction baseline in collective odds projection. Model scale is not correlated with performance, finance-domain tuning does not improve revealed-side identification, and platform incentives strongly shape higher-order results. StakeBench is packaged with evaluation code and dataset under CC-BY 4.0.