Dealer Behaviour and Market Quality When Insiders Trade

44 Pages Posted: 5 Mar 2002

See all articles by Narayan Y. Naik

Narayan Y. Naik

London Business School - Institute of Finance and Accounting

Pradeep K. Yadav

University of Oklahoma Price College of Business

David Hillier

University of Strathclyde - Department of Accounting and Finance

Abstract

This paper examines the impact of insider trading activity on the trading behaviour of dealers and on market quality. Specifically, the activity we investigate is the trading of London Stock Exchange listed equities by incumbent company directors. We find that dealers adjust their inventory control strategies during periods of such insider activity. In the ten day period subsequent to an insider trade, dealers tighten their inventory control resulting in stronger mean reversion in inventories. However, there is no evidence that the depth of the market is affected by the insider trade or that dealers feel the need to utilise the inter-dealer market to share inventory risks to a greater extent. However, when price changes due to temporary inventory considerations are taken into account, the large price changes reported in many insider-trading studies disappear. The paper also investigates if the dealer participating in the insider trade acts as a quasi-insider.

Keywords: Market Quality, Inventory Control, Insider Trading

JEL Classification: G10, G15

Suggested Citation

Naik, Narayan Y. and Yadav, Pradeep K. and Hillier, David, Dealer Behaviour and Market Quality When Insiders Trade. Available at SSRN: https://ssrn.com/abstract=302610 or http://dx.doi.org/10.2139/ssrn.302610

Narayan Y. Naik

London Business School - Institute of Finance and Accounting ( email )

Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
+44 20 7262 5050 (Phone)
+44 20 724 3317 (Fax)

Pradeep K. Yadav

University of Oklahoma Price College of Business ( email )

307 W.Brooks, Room 205A Division of Finance
Norman, OK 73019
United States
4053256640 (Phone)
4053255491 (Fax)

HOME PAGE: http://www.ou.edu/price/finance/faculty/pradeep_yadav.html

David Hillier (Contact Author)

University of Strathclyde - Department of Accounting and Finance ( email )

Curran Building
100 Cathedral Street
Glasgow G4 0LN
United Kingdom
44 0141 330 4809 (Phone)
44 0141 330 4442 (Fax)

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