|Targeted News Service|
New research by a team that includes a finance expert at
Their findings are being published under the title "Insider Trading in
"Our findings are somewhat controversial in that we're saying the presumed protectors of the shareholders and general public interests appear to be using their positions to their advantage," Zhao said. "The evidence shows it is happening. There is more insider trading within regulated firms than within unregulated firms. There is very, very strong indirect evidence that this is due to people involved in the regulatory agencies."
Here's an example of how it might work. A pharmaceutical firm has a new drug awaiting
By law, companies must disclose pertinent information to regulators. When regulators combine that pertinent information with information known only to them, it allows them or people they share that information with to have distinct stock market decision advantages, he said.
Another example involves the banking industry. A bank must report financial information to the Federal Reserve each quarter and that information is made public a few days later. Zhao said they've discovered that frequently, a higher amount of trading involving bank stock takes place during that few day period after information is provided to regulators but before it becomes publicly known.
"It's all indirect evidence. We don't know the identity of the traders or the mechanisms by which they are sharing the information - whether it's pillow talk, social media or simply telling other people such as hedge fund managers, but there is plenty of evidence it is happening," Zhao said.
The evidence takes several different forms. In some instances, a higher than usual cumulative abnormal return, or CAR, is a possible indicator. Essentially this is a noticeable increase or decrease in buying or selling of a specific stock just prior to public disclosure of pertinent information or decisions, Zhao said. If there is a substantial upswing or downswing in trading during that short window before a public announcement, it may be because of insider information.
Another indicator is a sharp increase in short sales, where people actually sell stocks they don't yet own. They negotiate a price to sell a stock to someone and lock in a deal, anticipating the stock price will plummet based on private information they possess. They then purchase the stock at the lower market price and profit from the price differential they had previously negotiated.
"There are other reasons for short sales, but if there is a spike in short sales, particularly right before bad news, it is a good indicator that insider trading may be involved, especially after controlling for other factors," Zhao said.
A third possible indicator involves Probability of Informed Trading, or PIN. Zhao said this measure captures the information contained in the pattern of informed and uninformed trades on a daily basis.