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Who are the Beneficiaries When Insiders Trade? An Examination of Piggybacking in the Brokerage Industry

35 Pages Posted: 6 Mar 2005  

Christopher Geczy

University of Pennsylvania - The Wharton School, Finance Department

Jinghua Yan

SAC Capital Advisors; University of Pennsylvania - Wharton Financial Institutions Center

Date Written: March 15, 2006

Abstract

We study the impact of brokerage relations with company insiders on insider-affiliated market makers' quoting behavior and the possibility of information leakage via piggybacking when insiders trade. We find that market makers affiliated with the brokers used by insiders post more aggressive ask quotes vis-à-vis their peers during periods when insiders trade. This aggressiveness is partially attributable to the pressure to complete sell orders for their company insider clients. However, we also find that this behavior is dependent on the management role of the insider and the degree of information asymmetry as measured by a) the number of analysts following the company, b) analyst forecast dispersion, c) bid-ask spread of the stock and d) post-event stock return. In addition, piggybacking diminishes when the firm of the broker-dealer making markets has had a prior investment banking business relationship with the company. The findings suggest that in addition to the volume of insider trades, the potential information content of insider trades also affects insider-affiliated market makers' abnormal quoting behavior. We find that this information leakage through insiders' brokers results in trading based on information signaled by those insiders.

Keywords: insider trading, brokerage, market maker

Suggested Citation

Geczy, Christopher and Yan, Jinghua, Who are the Beneficiaries When Insiders Trade? An Examination of Piggybacking in the Brokerage Industry (March 15, 2006). EFA 2005 Moscow Meetings; AFA 2007 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=676941 or http://dx.doi.org/10.2139/ssrn.676941

Christopher Charles Geczy

University of Pennsylvania - The Wharton School, Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
(215) 898-1698 (Phone)
(215) 898-6200 (Fax)

Jinghua Yan (Contact Author)

SAC Capital Advisors ( email )

330 Madison Avenue, 35th Floor
New York, NY 10017
United States

University of Pennsylvania - Wharton Financial Institutions Center ( email )

2306 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104
United States

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