Price Revelation from Insider Trading: Evidence from Hacked Earnings News
90 Pages Posted: 16 Apr 2019 Last revised: 29 May 2020
Date Written: May 28, 2020
From 2010--2015, a group of convicted traders accessed earnings information hours before their public release by hacking several major newswire services. We use their "insider" trading as a natural experiment to investigate how efficiently markets incorporate private information in prices. 15% of a firm's earnings surprise was incorporated into its stock price prior to its public release when the hackers had access to non-public information. Volume and spread-based measures of informed trading detect this activity, but order flow-based measures do not. We find evidence that the presence of these illegally informed traders caused market makers to increase spreads, which increased the cost of uninformed investors' trades by more than the market makers lost from trading against the informed traders, suggesting that informed trading can have negative externalities on financial markets.
Keywords: cyber risks, earnings announcements, insider trading, market price efficiency
JEL Classification: G10, G12, G14
Suggested Citation: Suggested Citation