Informed Trading and Cybersecurity Breaches

49 Pages Posted: 17 Feb 2018 Last revised: 12 Jun 2018

Joshua Mitts

Columbia Law School; Columbia University - Columbia Business School

Eric L. Talley

Columbia University - School of Law

Date Written: March 14, 2018

Abstract

Cybersecurity has become a significant concern in corporate and commercial settings, and for good reason: a threatened or realized cybersecurity breach can materially affect firm value for capital investors. This paper explores whether market arbitrageurs appear systematically to exploit advance knowledge of such vulnerabilities. We make use of a novel data set tracking cybersecurity breach announcements among public companies to study trading patterns in the derivatives market preceding the announcement of a breach. Using a matched sample of unaffected control firms, we find significant trading abnormalities for hacked targets, measured in terms of both open interest and volume. Our results are robust to several alternative matching techniques, as well as to both cross-sectional and longitudinal identification strategies. All told, our findings appear strongly consistent with the proposition that arbitrageurs can and do obtain early notice of impending breach disclosures, and that they are able to profit from such information. Normatively, we argue that the efficiency implications of cybersecurity trading are distinct — and generally more concerning — than those posed by garden-variety information trading within securities markets. Notwithstanding these idiosyncratic concerns, however, both securities fraud and computer fraud in their current form appear poorly adapted to address such concerns, and both would require nontrivial re-imagining to meet the challenge (even approximately).

Keywords: Insider Trading, Cyber-Security, Derivatives, Securities Fraud

JEL Classification: K00, K22, G00, G12, G14

Suggested Citation

Mitts, Joshua and Talley, Eric L., Informed Trading and Cybersecurity Breaches (March 14, 2018). Harvard Business Law Review, Vol. 8, 2018; Columbia Law and Economics Working Paper No. 580. Available at SSRN: https://ssrn.com/abstract=3107123 or http://dx.doi.org/10.2139/ssrn.3107123

Joshua Mitts

Columbia Law School ( email )

435 West 116th Street
New York, NY 10025
United States

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Eric L. Talley (Contact Author)

Columbia University - School of Law ( email )

435 West 116th Street
New York, NY 10025
United States

HOME PAGE: http://www.erictalley.com

Register to save articles to
your library

Register

Paper statistics

Downloads
577
rank
41,430
Abstract Views
2,136
PlumX