Cloaked Trading

Journal of Investment Consulting, Vol. 17, No. 2, 2016

15 Pages Posted: 20 Jan 2017 Last revised: 28 Jan 2017

See all articles by Lauren Cohen

Lauren Cohen

Harvard Business School; National Bureau of Economic Research (NBER)

Dong Lou

London School of Economics & Political Science (LSE); Centre for Economic Policy Research (CEPR)

Christopher J. Malloy

Harvard Business School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: January 18, 2017

Abstract

Using a novel, proprietary database of micro-level trading activities by asset managers, we show strong evidence of asset managers engaging in strategic trading in order to “cloak” their most valuable trades. This takes the form, for instance, of a manager who sells her entire position of Microsoft on March 30, and then repurchases to re-establish the same position on April 1. This manager will economically be holding the same position throughout, yet without having to publicly signal this position. These cloaked trades earn an abnormal return of 370 basis points in the following month, or over 36% per year. We further show that the same managers do not engage in such information-rich cloaked trading around other month ends (non-reporting months), nor in institutional accounts (that are not subject to the reporting requirements) at the exact same quarter-end dates. Moreover, the returns to these cloaked trades continue to accrue over the subsequent quarter and do not reverse in the following year, implying that these cloaked trades are informative about fundamental firm value, which is gradually revealed into prices.

Keywords: Strategic Trading, Information, Asset Management, Investment

JEL Classification: G02, G11, G12, L51

Suggested Citation

Cohen, Lauren and Lou, Dong and Malloy, Christopher J., Cloaked Trading (January 18, 2017). Journal of Investment Consulting, Vol. 17, No. 2, 2016. Available at SSRN: https://ssrn.com/abstract=2901494

Lauren Cohen (Contact Author)

Harvard Business School ( email )

Rock Center 321
Soldiers Field
Boston, MA 02163
United States

HOME PAGE: http://www.people.hbs.edu/lcohen

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Dong Lou

London School of Economics & Political Science (LSE) ( email )

Department of Finance
Houghton Street
London, WC2A 2AE
United Kingdom
+44 (0)207 1075360 (Phone)

HOME PAGE: http://personal.lse.ac.uk/loud/

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Christopher J. Malloy

Harvard Business School ( email )

Soldiers Field Road
Baker Library 277
Boston, MA 02163
United States
617-495-4383 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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