The Quick and the Informed: Insider Trading Profitability in Algorithmic Trading Environment
41 Pages Posted: 29 Apr 2019 Last revised: 4 Jul 2019
Date Written: May 21, 2019
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: Suggested Citation