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Wednesday, November 18, 2015

Prosecuting Insider Trading

The law on insider trading has been accused of being too vague, and soon it might be accused of being too narrow—the U.S. Supreme Court last month declined to hear an appeal from a case that significantly narrowed the definition of insider trading by requiring proof that an inside tip recipient knew the confidential information came from an insider and that the insider disclosed the information for a clear personal benefit. The result of the case was the overturning of 2 convictions for insider trading and dropped charges against others.

The problem for prosecutors is thus increasingly two-fold: they can’t count on the legal framework for their efforts, and, as commentators have noted, catching insider trading is difficult in the first place. My co-author and I set out to see if we could aid prosecution of insider trading by detecting the presence of an insider trading in the first place, and how the market responds to the insider’s activity.

Analyzing the dataset composed of shares from NASDAQ, AMEX, the New York Stock Exchange, and over the counter (OTC) markets, we find that insider trades are different from surrounding trades in both trade to trade price impact and trade lot volume, when compared with trades executed in the same thirty minute interval by other traders. The size and volume effect is most pronounced on the two specialist exchanges of the American Stock Exchange (AMEX) and the New York Stock Exchange (NYSE). Trade to trade price movement is statistically significant at the 1% level for the panel of NYSE and AMEX shares.

While insider trades possess attributes that differentiate them from surrounding trades, a great deal of those attributes depends on the trade characteristics – aggressive market orders will draw scrutiny due to their price impact, whereas limit orders are less noticeable. Insiders trade lot sizes that are also larger than other market participants at the time, thereby potentially drawing attention from regulators and surveillance departments.

You can read our article forthcoming in the Wake Forest Law Review here.

Posted by Margaret Ryznar on November 18, 2015 at 11:40 AM | Permalink


Yes, it definitely seems like the Government is on the losing side these days, and there's no better incentive.

Posted by: Margaret Ryznar | Nov 18, 2015 9:40:45 PM

The US Attorney's office is reaping the rewards of the Government opposing for the last 50 years every attempt to codify the law of insider trading through legislation. The Government was confident that the Courts would always retroactively interpret Rule 10b-5 to mean whatever the Government wanted it to mean. Perhaps now the Government will be willing to go to Congress and have an open debate about the conflicting policies: fairness v. efficiency, and the concerns about discouraging beneficial private efforts to develop information about security prices.

Posted by: Douglas Levene | Nov 18, 2015 6:20:36 PM

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