Becker Meets Kyle: Inside Insider Trading

72 Pages Posted: 17 Mar 2018 Last revised: 14 Mar 2019

See all articles by Marcin T. Kacperczyk

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics; National Bureau of Economic Research (NBER)

Emiliano Pagnotta

Imperial College Business School

Date Written: March 13, 2019


How do illegal insider traders act on private information? We address this question using a unique sample of illegal insider traders convicted by the Securities Exchange Commission (SEC). To shed light on the traders’ investment strategies, we analyze, theoretically and empirically, the tradeoff between the risk of information becoming public (information risk), and the risk of being subject to enforcement (legal risk). Using a regression model and various shocks to enforcement risk, we find that a subset of investors responds to this tradeoff by splitting their trades more and trading less aggressively in the presence of greater legal risk and smaller information risk. At the same time, a large fraction of traders does not internalize such a tradeoff. The insiders manage their trades’ size according to prevailing liquidity conditions, volatility of returns, noise trading activity, and the precision of the signal. Individual characteristics, such as investing expertise and age, also play an essential role. Insiders facing increasing legal risk concentrate more on information of higher value. Thus, insider trading enforcement could hamper stock price informativeness.

Keywords: Private Information, Insider Trading, Trading Strategies, Liquidity, Asset Prices, Volume, Stock Markets, Option Markets, Volatility, SEC, Financial Crime

JEL Classification: D82, D83, G14, G18, G40, G41

Suggested Citation

Kacperczyk, Marcin T. and Pagnotta, Emiliano, Becker Meets Kyle: Inside Insider Trading (March 13, 2019). Available at SSRN: or

Marcin T. Kacperczyk

Imperial College London - Accounting, Finance, and Macroeconomics ( email )

South Kensington campus
London SW7 2AZ
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Emiliano Pagnotta (Contact Author)

Imperial College Business School ( email )

Imperial College Business School, Tanaka Building
London, SW7 2AZ
Great Britain
+447478734028 (Phone)

Register to save articles to
your library


Paper statistics

Abstract Views
PlumX Metrics