The Quick and the Informed: Insider Trading Profitability in Algorithmic Trading Environment

41 Pages Posted: 29 Apr 2019 Last revised: 4 Jul 2019

See all articles by Yuyun Huang

Yuyun Huang

The University of Western Australia

Millicent Chang

The University of Western Australia; University of Wollongong

Sirimon Treepongkaruna

The University of Western Australia; Financial Research Network (FIRN)

Joey (Wenling) Yang

The University of Western Australia

Date Written: May 21, 2019

Abstract

We examine the role of algorithmic trading (AT) in restraining insider trading profits. Using insider filings to SEC and AT computed from order book data from 2001-2010, we find that AT attenuates insider trading profits via two channels: the information channel – AT reduces information asymmetry by incorporating public information; and the trading channel – some algorithmic traders adopt predatory trading strategies to extract rent from insiders. Accordingly, we find evidence of AT restraining profits in insider sales, and in routine insider trades. Further analysis suggests this effect more pronounced in firms with higher degree of information asymmetry, and routine insider trades in large sizes. A natural experiment suggests this effect is causal.

Keywords: Algorithmic trading, Insider trading, Information environment, Price efficiency

JEL Classification: G11, G22

Suggested Citation

Huang, Yuyun and Chang, Millicent and Treepongkaruna, Sirimon and Yang, Joey (Wenling), The Quick and the Informed: Insider Trading Profitability in Algorithmic Trading Environment (May 21, 2019). Available at SSRN: https://ssrn.com/abstract=3373433 or http://dx.doi.org/10.2139/ssrn.3373433

Yuyun Huang

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia

Millicent Chang

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
AUSTRALIA

University of Wollongong ( email )

Northfields Avenue
Wollongong, New South Wales 2522
Australia

Sirimon Treepongkaruna

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia
+61864887853 (Phone)
+61864881086 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Joey (Wenling) Yang (Contact Author)

The University of Western Australia ( email )

35 Stirling Highway
Crawley, Western Australia 6009
AUSTRALIA

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