Insider Trading with Penalties

47 Pages Posted: 14 Jun 2019 Last revised: 22 Apr 2022

See all articles by Sylvain Carre

Sylvain Carre

LEDa

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER)

Franck Gabriel

I.S.F.A.

Multiple version iconThere are 2 versions of this paper

Date Written: April 5, 2022

Abstract

We consider a Kyle (1985) one-period model where insider trading may be subject to a penalty that is increasing in trade size. We characterize the solution - the equilibrium price and optimal trading strategy - explicitly and establish existence and uniqueness for an arbitrary penalty function for the case of uniformly distributed noise. We use this framework to capture the difference between legal and illegal insider trading, and identify the set of `efficient penalty functions' that would be optimal for a regulator that seeks to minimize expected uninformed traders' losses for a given level of price informativeness. Simple policies consisting of a fixed penalty upon nonzero trades belong to this set and can be used to implement any efficient outcome. Using numerical analysis, we show the robustness of our results to different distributional assumptions.

Keywords: Kyle model, non-linear equilibria, existence and uniqueness, market microstructure, insider trading, market regulation, efficient penalties

JEL Classification: C72, G14

Suggested Citation

Carre, Sylvain and Collin-Dufresne, Pierre and Gabriel, Franck, Insider Trading with Penalties (April 5, 2022). Swiss Finance Institute Research Paper No. 19-68, Available at SSRN: https://ssrn.com/abstract=3388002 or http://dx.doi.org/10.2139/ssrn.3388002

Sylvain Carre (Contact Author)

LEDa ( email )

Place du Maréchal de Tassigny
Paris, Cedex 16 75775
France

HOME PAGE: http://https://sites.google.com/view/sylvain-carre/research

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

Swiss Finance Institute

c/o University of Geneva
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Switzerland

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

Franck Gabriel

I.S.F.A. ( email )

50, Avenue Tony Garnier
Lyon Cedex 07, 69366
France

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