Becker Meets Kyle: Inside Insider Trading (original) (raw)

Public Disclosure and Dissimulation of Insider Trades

Econometrica, 2001

Regulation requiring insiders to publicly disclose their stock trades after the fact complicates the trading decisions of informed, rent-seeking insiders. Given this requirement, we present an insider's equilibrium trading strategy in a multiperiod rational expectations framework. Relative to Kyle (1985), price discovery is accelerated and insider profits are lower. The strategy balances immediate profits from informed trades against the reduction in future profits following trade disclosure and, hence, revelation of some of the insider's information. Our results offer a novel rationale for contrarian trading: dissimulation, a phenomenom distinct from manipulation, may underlie insiders' trading decisions.

On the effectiveness of enforcement of insider trading laws

2009

Empirical research has found significant effects of enforcement of insider trading laws on cost of equity. The reduction in cost of eq uity is expected when the adverse selection problem (i.e. the degree of insider trading) decrea ses. In this paper we model the game between a supervisor enforcing insider trading legi slation and a trader possibly trading on inside information. The resulting equilibrium strat egies illustrate when enforcement is indeed effective or, equivalently, when insiders are somet i s deterred from using their inside information and how further reduction in insider tr ading can be achieved. We discuss legal and economic implications as well as implications f or empirical research. It appears that equilibrium strategies exist with enforcement but w here all insider information is still used. This may be important for empirical research. We al so find situations where improvements in the quality of the risk analysis system of the supe rvisor make the degree of i...

INSIDER TRADING IN THE GLOBAL ECONOMIC ENVIRONMENT: ELEMENTS OF CRIMINAL LIABILITY

IAEME PUBLICATION, 2020

The article addresses emerging issues of criminal liability for insider trading within the global economic environment. Based on comparative analyses of Ukrainian and American approaches toward understanding the nature and negative consequences of insider trading for the national stock markets, key research pragmatic conclusions are formulated. A general conclusion elaborates on the idea that the level of effectiveness of criminal law protection of Ukrainian stock market not at least depends on the textual quality of the insider trading provision of the Criminal Code of Ukraine (Art. 232-1), which describes key elements of the offense and also connects the Criminal Code norm with the regulatory framework on stock market operation. Analysis of American, Ukrainian and, to a lesser extent, other European experience in combating insider abuse suggests that improvement of the national stock market legislation should be exercised in different directions, among which: increasing transparency in the activities and management of joint stock companies; tightening requirements for reporting and disclosure for business entities, whose shares and other securities circulatt on stock market; providing investors with unimpeded access to documents and information about large shareholders; increased attention to transactions with the company’s shares carried out by its employees; prohibition on combining auditing and consulting functions within one company, etc. Such measures should not excessively intersect the realm of criminal law relations, otherwise this might lead to the collapse of the stock market protection framework

The effect of insider trading laws and enforcement on stock market transaction cost

Review of Quantitative Finance and Accounting, 2020

Theoretical arguments suggest that as countries enact insider trading laws and complement them with enforcement, stock market information risk reduces and investor participation increases, and this will therefore have a negative effect on liquidity trading cost. Consistent with this expectation, based on panel data comprised of 32 countries for the period 2001-2015, we find that stringent insider trading laws and enforcement reduce stock market transaction cost. However, in countries where investor protection is poor, our results show that stringent insider trading laws have no effect on liquidity trading cost. We further find that stringent insider trading laws interact with institutional quality to reduce liquidity trading cost. Our findings are robust to difference-indifferences based on the 2008 global financial crises. The overall evidence implies that market participants will experience lower liquidity trading cost if insider trading laws are enforced.

Insider Trading and the Myth of Market Confidence

Washington University Journal of Law and Policy, 2017

Promoting public confidence in securities markets is a policy goal that is frequently cited by commentators, Congress, the courts, regulators, and prosecutors for the adoption and vigorous enforcement of insider trading laws. For example, in describing the motivating purpose and need for the Insider Trading and Securities Enforcement Act of 1988, Congress explained that insider trading “diminishes the public’s faith” in capital markets, adding that “the small investor will be—and has been—reluctant to invest in the market if he feels it is rigged against him.” In the seminal insider trading case United States v. O’Hagan, the U.S. Supreme Court explained that “investors likely would hesitate to venture their capital in a market where [insider trading] is unchecked by law.” More recently, Preet Bharara, who earned the title of “Wall Street Sheriff” by successfully prosecuting over seventy insider trading cases in the wake of the 2008 financial crisis, emphasized that part of his job a...

Does the Adoption of an Information-Connected Approach Reduce Insider Trading?

SSRN Electronic Journal, 2008

Many countries adopt either an information-connected approach or the person-connected approach to regulate insider trading. In this paper, we examine the impact of countries switching from a person-connected approach to an information-connected approach using 502 tender offer announcements in Singapore, Malaysia and Australia, over the period from 1986 to 2006. We find that illegal insider trading in Singapore decreases with the enactment of insider trading regulations. Insider trading in Malaysia, on the other hand, only decreases after the enforcement of insider trading regulations. For Australia, we observe that the enactment or enforcement of insider trading regulation has little impact on the market. Our findings show that market participants react to legislation change earlier if the regulator concerned has a strong reputation for enforcement. In other words, the timing at which the market can be expected to react to legislation changes is a function of a government's reputation for enforcement.

Retail Insider Trading and Market Price Efficiency: Evidence from Hacked Earnings News

SSRN Electronic Journal, 2019

From 2010-2015, a group of convicted traders accessed earnings information hours before their public release by hacking several major newswire services. We use their "insider" trading as a natural experiment to investigate how efficiently markets incorporate private information in prices. 15% of a firm's earnings surprise was incorporated into its stock price prior to its public release when the hackers had access to non-public information. Volume and spreadbased measures of informed trading detect this activity, but order flow-based measures do not. We find evidence that uninformed, professional traders traded in the same direction, amplifying the impact of informed trading.

The Conditional Performance of Insider Trades

The Journal of Finance, 1998

This paper estimates the performance of insider trades on the closely held Oslo Stock Exchange (OSE) during a period of lax enforcement of insider trading regulations. Our data permit construction of a portfolio that tracks all movements of insiders in and out of the OSE firms. Using three alternative performance estimators in a time-varying expected return setting, we document zero or negative abnormal performance by insiders. The results are robust to a variety of trade characteristics. Applying the performance measures to mutual funds on the OSE, we also document some evidence that the average mutual fund outperforms the insider portfolio. CORPORATE INSIDERS, I.E., INDIVIDUALS closely related to the firm either through direct employment or through participation on supervisory committees and boards, will from time to time possess information about the firm's future cash f low which is not yet ref lected in the firm's stock price. Insiders who trade on the basis of such information tend to purchase stocks just prior to abnormal price increases and to sell just prior to abnormal price declines. Employing traditional event-study techniques, in which equal-weighted average abnormal stock returns are estimated over a fixed time period following insider trades, the extant empirical literature tends to support this "buy low and sell high" hypothesis. For example, Jaffe (1974) and Seyhun (1986) present evidence of significant abnormal stock returns following reported insider trades on the New York and the American Stock Exchanges. Similarly, Baesel and Stein (1979) and Fowler and Rorke (1984) conclude that insiders on the Toronto Stock Exchange earn abnormal profits, and Pope, Morris, and Peel (1990) reach a similar conclusion for firms in the United Kingdom.

Regulating Insider Trading When Investment Matters *

Review of Finance, 2004

We provide a general framework for analyzing the effects of insider trading on real investment and welfare as well as the consequences of different regulatory policies in a model where all traders are rational expected-utility maximizers and aware of their position in the market. We find that: with costly information acquisition, an ''abstain-or-disclose'' rule tends to be optimal; with free information acquisition, laissez-faire is better. This suggests enforcing an abstain-or-disclose rule with a high standard of proof for inside information. Our approach also uncovers the pitfalls of welfare analysis in the noise-trader model.

Turning financial markets inside out: how insider trading regulation really works

2010

Insider trading regulation produces excess speculation and stimulates deceptive stock exchange trading -the very things that it is supposed to eliminate. In Sweden, this was part of a deliberate political agenda to make financial markets livelier and more exciting, almost as if they were games. Now, the so-called 'outsiders' (the public) are in fact confined inside the game, while the 'insiders' (the market professionals) remain outside the game controlling the action.