How Much Does an Illegal Insider Trade?

41 Pages Posted: 16 Mar 2010

See all articles by Alex Frino

Alex Frino

The University of Sydney - Discipline of Finance; Financial Research Network (FIRN)

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics

Brad Wong

The University of Sydney

Hui Zheng

Discipline of Finance, The University of Sydney; Capital Markets CRC Limited

Multiple version iconThere are 2 versions of this paper

Date Written: March 9, 2010

Abstract

We develop a model of the choice of trade size by an illegal insider. The model recognises that insiders respond to both the expected gains and costs associated with their crime, and choose a trade size which maximises the expected utility of wealth associated with the trade. The model predicts that the size of an insider’s trade is a function of the value of their information, the expected penalty if detected and a number of variables related to the probability of detection which includes the structure of the market in which they trade, the number of days prior to an information announcement that they transact and their relationship to the corporation with which they trade. The model also recognises that besides being criminals, illegal insider traders are also investors, and therefore respond to the volatility of asset returns in the security for which they have non-public information. Using a unique dataset hand-collected from the litigation reports of the Securities and Exchange Commission and court cases we provide evidence consistent with the predictions of the model.

JEL Classification: G10

Suggested Citation

Frino, Alex and Satchell, Stephen E. and Wong, Brad and Zheng, Hui, How Much Does an Illegal Insider Trade? (March 9, 2010). Available at SSRN: https://ssrn.com/abstract=1567764 or http://dx.doi.org/10.2139/ssrn.1567764

Alex Frino

The University of Sydney - Discipline of Finance ( email )

Futures Research Centre
P.O. Box H58
Sydney NSW
Australia
+61 2 9299 1809 (Phone)
+61 2 9299 1830 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
44 (0)1223 335213 (Phone)
44 (0)1223 335475 (Fax)

HOME PAGE: http://www.econ.cam.ac.uk/faculty/satchell/index.h

Brad Wong

The University of Sydney ( email )

University of Sydney
Sydney, NC NSW 2006
Australia

Hui Zheng (Contact Author)

Discipline of Finance, The University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9351 3915 (Phone)
+61 2 9351 6461 (Fax)

Capital Markets CRC Limited ( email )

GPO Box 970
55 Harrington Street
Sydney, NSW 2001
Australia

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