Public Disclosure of Trades by Corporate Insiders in Financial Markets and Tacit Coordination

Abstract

Like Cournot competitors in product markets, financial market insiders with common private information trade more aggressively than a monopolist with the same information, and thereby dissipate expected profits. Where the same insiders repeatedly receive private information, they may tacitly collude to limit trades and increase profits. Present rules requiring public reporting of insider trades (unintendedly) may allow insiders to improve upon aggregate volume or price in monitoring each other's trades, thereby facilitating collusion. Relative to product markets, the presence of a strategic market maker complicates the equilibrium. The results imply regulators may reduce tacit collusion by not publicizing insider trades.

JEL Classification: G28, K22, M41