Using ETFs to Conceal Insider Trading

41 Pages Posted: 1 Feb 2023 Last revised: 18 Jul 2023

See all articles by Elza Eglīte

Elza Eglīte

Stockholm School of Economics, Riga

Dans Štaermans

Stockholm School of Economics, Riga

Vinay Patel

University of Technology Sydney (UTS)

Tālis J. Putniņš

University of Technology Sydney (UTS); Digital Finance CRC; Stockholm School of Economics, Riga

Date Written: July 15, 2023

Abstract

We show that exchange traded funds (ETFs) are used in a new form of insider trading known as “shadow trading.” Our evidence suggests that some traders in possession of material non-public information about upcoming M&A announcements trade in ETFs that contain the target stock, rather than trading the underlying company shares, thereby concealing their insider trading. Using bootstrap techniques to identify abnormal trading in treatment and control samples, we find significant levels of shadow trading in 3-6% of same-industry ETFs prior to M&A announcements, equating to at least $212 million of such trading per annum. Our findings suggest insider trading is more pervasive than just the “direct” forms that have been the focus of research and enforcement to date.

Keywords: insider trading, shadow trading, ETF, stock

JEL Classification: G14, G23

Suggested Citation

Eglīte, Elza and Štaermans, Dans and Patel, Vinay and Putnins, Talis J., Using ETFs to Conceal Insider Trading (July 15, 2023). Available at SSRN: https://ssrn.com/abstract=4343579 or http://dx.doi.org/10.2139/ssrn.4343579

Elza Eglīte

Stockholm School of Economics, Riga

Dans Štaermans

Stockholm School of Economics, Riga

Vinay Patel (Contact Author)

University of Technology Sydney (UTS) ( email )

15 Broadway, Ultimo
PO Box 123
Sydney, NSW 2007
Australia

Talis J. Putnins

University of Technology Sydney (UTS) ( email )

PO Box 123
Broadway
Sydney
Australia
+61 2 9514 3088 (Phone)

Digital Finance CRC ( email )

Stockholm School of Economics, Riga ( email )

Strelnieku iela 4a
Riga, LV 1010
Latvia
+371 67015841 (Phone)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
2,683
Abstract Views
9,521
Rank
9,447
PlumX Metrics