How to make money from insider trading ... without insider trading

Recently I read this article on how hackers obtained private press release and then sold this information to traders who then acted on them to make profitable trades.

Seemingly the trading methodology was to buy out of money options that are assumed to be worthless just before the press release was made public, watch the value of these options skyrocket and then exercise or sell them.

The theoretical financial world is based on the concept of a purely rational market, in which information is perfectly distributed and actors act completely rationally. I have no experience in the financial world, however I would believe the opposite to be true in practice. It is probably filled with algorithms that follow the herd, and investors that trade in mischievous ways using insider knowledge.

So why don't you create algorithms to exploit that? Program in press release times, look for unexpected or unexplainable trading activity across the different markets, and piggy back off the success of insider trading? Sure you might lose nearly as many as you gain, but if the presumption that there are people trying to earn their small fortune through insider trading holds true, I imagine this would be a profitable strategy. You might have to ask a lawyer about the legality of making a profit off trades hypothesised to be illegal.

Now I know there are several problems with this idea. The first being that the insider trader has captured all of the gains. I wouldn't imagine this would be the case, due to lack of capital, desire to not be caught, or inability to arbitrage all markets at once. In addition I couldn't imagine an insider trader shifting the market so much as to overshoot the markets reaction to the information.

The second objection is that algorithms are already noticing the sudden moves and taking some of the profits as market maker. Your hidden advantage is pricing in the expected timing of future announcements into your algorithm to exploit this. Someone buying out of money options about to expire is normally crazy. Doing so when the expiry is soon after a major company announcement is a potential signal. Picking up on that signal is what will make this strategy work.

The third objection is that there is probably a hedge fund doing this already. And you're probably right. I don't have the time and/or resources to investigate this any further right now. It is merely a thought experiment on how the assumption of insider knowledge influencing the market could lead to strategies to exploit this fact. I'd be surprised if it worked, but most strategies are worth a shot.