Strategic Trading in the Wrong Direction By a Large Institutional Insider

60 Pages Posted: 14 Jun 2006 Last revised: 1 Sep 2009

See all articles by Joseph H. Golec

Joseph H. Golec

University of Connecticut - Department of Finance

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate

Date Written: July 10, 2009

Abstract

Many theoretical papers suggest that large informed traders should make misleading or random trades to disguise their trading. Alternatively, informed traders may trade purely on their estimate of stock value. This paper examines the trading behavior of a large institutional insider that periodically trades in the wrong direction, i.e., makes occasional sell (buy) trades within packages of buy (sell) trades. Using a hand-collected data set, we find that three quarters of the trade packages include wrong-direction trades. Wrong trades appear to be used mostly to disguise right-direction trades. We find that the wrong-trade stocks are larger and have less noisy returns, hence, they lack natural disguise. Wrong trades are relatively small, used to accentuate return volatility, distributed evenly during a package of trades, and are not consistently profitable.

Keywords: Strategic Trading, Manipulation, Institutional Investor, Insider

JEL Classification: G23, G14, D82

Suggested Citation

Golec, Joseph and Giambona, Erasmo, Strategic Trading in the Wrong Direction By a Large Institutional Insider (July 10, 2009). Available at SSRN: https://ssrn.com/abstract=908708 or http://dx.doi.org/10.2139/ssrn.908708

Joseph Golec (Contact Author)

University of Connecticut - Department of Finance ( email )

School of Business
2100 Hillside Road
Storrs, CT 06269
United States

Erasmo Giambona

Syracuse University - Whitman School of Management - Finance Department; James D. Kuhn Center for Real Estate ( email )

721 University Avenue
RM 120-D
Syracuse, NY 13244-2450
United States
315 443-4885 (Phone)

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