Insider Trading Rife, Economic Studies Show

by: The Knowledge Group

February 20, 2018


Have individual prosecutions of rogue traders put a damper on insider trading? New research examining insider trading shows they might be missing the bigger picture.

One study found significant insider profiteering from the financial crisis. Economists found “strong evidence” of links between political connections and tips leading to trading decisions—particularly in the time when the government distributed Troubled Asset Relief Program (TARP) funds.

Crisis Predators

Enacted in 2008, TARP enabled the federal treasury to purchase or insure up to $700 billion in troubled assets. Large U.S. banks received $250 billion of this funding. Confidential deliberations related to distributions occurred between the government and politically connected insiders.

Prof. Alan Jagolinzer, of the Judge Business School at the University of Cambridge, found that these insiders occupied “a position to be disproportionately privately informed about the scope of government intervention.”

Jagolinzer says the findings indicate that insiders exploited their positions to trade to their own advantage following TARP’s creation, just prior to the infusion of funds.

Liquidation Tip-Offs

Another study, from Harvard Business School, showed big investors’ propensity to trade more actively just before portfolio liquidations. Retail investors learning of the actions after the companies already announced them suffer a disadvantage that translates into significant opportunity losses, the study suggests.

Brokers with inside knowledge may stand to benefit from tipping off major clients about forthcoming liquidations, leading to dumping of relevant assets.

The research examined trading data from Abel Noser Holdings. It covered parties involved in trades from 1999 through 2014.

Can Pervasive Insider Trading Be Curbed?

What’s interesting about the new research is the way economists are now using data sets to analyze patterns. Their findings indicate pervasive, ongoing insider activity in the stock markets.

Some of the published findings even suggest that the whole of the stock-trading system is rigged.

This brings up questions about how the law can refocus—from prosecuting the one bad apple to confronting the whole bunch.