Insider Trading with Penalties

45 Pages Posted: 29 Oct 2019 Last revised: 8 Apr 2022

See all articles by Sylvain Carre

Sylvain Carre


Pierre Collin-Dufresne

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

Franck Gabriel


Multiple version iconThere are 2 versions of this paper

Date Written: April 5, 2022


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). Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: or

Sylvain Carre (Contact Author)

LEDa ( email )

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Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne ( email )

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Swiss Finance Institute

c/o University of Geneva
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National Bureau of Economic Research (NBER)

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Franck Gabriel

I.S.F.A. ( email )

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Lyon Cedex 07, 69366

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