Spread behavior around board meetings for firms with concentrated insider ownership

For a set of firms with concentrated insider ownership, we find that (a) the bidask spread changes significantly around the board meeting dates, and (b) the actual number of transactions by insiders increases following the board meetings. We also find that there is a statistically significant relationship between spread and the number of insider trades surrounding the board meeting dates. Furthermore, neither an increase in the number of insider transactions nor any significant relationship between insider trading and the spread is observed for the same set of firms around non-board meeting dates.     

Front-Running by Mutual Fund Managers: A Mixed Bag

This paper evaluates the welfare implications of front-runningby mutual fund managers. It extends the model of Kyle (1985)to a situation in which the insider with fundamentals-informationcompetes against an insider with trade-information and in whichnoise trading is endogenized. Noise traders are small investorstrading through mutual funds to hedge non-tradable or illiquidassets. The insider with trade-information is one of the fundmanagers. We find that her front-running activity reduces theliquidity costs of her customers, but it also reduces theirhedging benefits. As a result, the customers of the front-runningmanager may be worse off and place smaller orders. The oppositeis true, however, for those investors who are not subject tofront-running. In aggregate, front-running has either no orpositive consequences for welfare. JEL Classification. G14,G23.     

Kyle v. Kyle (’85 v. ’89)

We characterize equilibrium outcomes in a Kyle demand-submission market model of speculative trade. This market design mirrors that used at open on most exchanges, as well as the auction format used for many IPOs. We contrast equilibrium outcomes with those that obtain in the corresponding competitive market maker structure. We prove that the two market structures yield identical total speculator profits only if their signals are independently distributed. If the signals of speculators are correlated in any way, market design matters: the demand-submission market design increases competition, drives down speculator profit, and leads to more informative prices. We argue that these facts explain the prevalence of the demand-submission market design. We thank Pete Kyle for helpful comments. Both authors gratefully acknowledge financial support from the National Science Foundation grant SES-0317700. See, e.g., Admati and Pfleiderer (1988), and dynamic multi-speculator extensions such as Foster and Viswanathan (1994), (1996), Back, Cao and Willard (2000), Huddart, Hughes and Levine (2001), Baruch (2002), and Bernhardt and Miao (2004).     

Information transfer,microstmctures and intraday price return spikes

Previous research has identified overnight public information as the cause of higher opening returns and mean reversion in security markets. This paper tests this hypothesis by using an intervention and transfer function time series model to filter out the dynamic effects of an overnight information set on the opening, and subsequent, intraday AOI stock and SPI futures intraday price returns. A further research objective was to analyse the process by which information is transferred into prices and whether there is a differential impact across stock and futures markets. It was determined that the information contained in the overnight US stock market had: (i) a differential impact on the Australian stock and futures market, and (ii) after filtering out the impact of overnight information, a significant reversal tendency remained in both markets after opening. Further analysis supported the conclusion that price spikes at opening were not wholly related to overnight information. Other possible explanations, such as different trading mechanisms, did not provide a satisfactory explanation. Overall, it appears that the uncertainty participants face at the beginning of a trading session may induce a number of subtle market reactions (both rational and irrational), in markets with different microstmctures and trading clientele.     

An empirical investigation of trading on asymmetric information and heterogeneous prior beliefs

The purpose of this study is to identify and analyze inter-temporal trading patterns attributable to informed trading. Recent theoretical models posit that heterogeneous prior beliefs provide a source of trading volume in addition to the commonly accepted trading motives of liquidity and asymmetric information. After separating informed from uninformed trading using the estimation procedure of Easley et al. [Journal of Finance 51 (1996) 1405], we test for the presence of trading on heterogeneous beliefs as opposed to asymmetric information. The empirical findings confirm the existence of trading on heterogeneous prior beliefs and generally support the inter-temporal patterns proposed by Wang [Journal of Financial Markets 1 (1998) 321].     

The diversity of high-frequency traders

The regulatory debate concerning high-frequency trading (HFT) emphasizes the importance of distinguishing different HFT strategies and their influence on market quality. Using data from NASDAQ-OMX Stockholm, we compare market-making HFTs to opportunistic HFTs. We find that market makers constitute the lion's share of HFT trading volume (63–72%) and limit order traffic (81–86%). Furthermore, market makers have higher order-to-trade ratios and lower latency than opportunistic HFTs. In a natural experiment based on tick size changes, we find that the activity of market-making HFTs mitigates intraday price volatility.     

Insider trading and risk aversion

This paper is a continuous time version of Holden and Subrahmanyam (Economics Letters 44 (1994) 181). The paper extends Kyle (Econometrica 53 (1985) 1315) by introducing risk aversion on the side of the monopolist informed trader and allows for the liquidity traders instantaneous demand to depend on cost of trading, as well as on the risk of the stock. The main result of the paper is that, in equilibrium, the price pressure decreases with time regardless of the elasticity of the liquidity demand function.     

Trading on inside information when there may be tippees

This paper compares four scenarios of a model in which, for the possible presence of tippees, firm insiders may not be the only persons having inside information. The four scenarios are that of free insider trading, that with a ban on insider trading, that of observable insider trading, and that with full disclosure of information. Each of these scenarios is shown to be strictly more efficient than the one before so long as there is a positive probability that a tippee exists. The paper sheds some light on why and how insider trading should be regulated, and also on the role of the disclosure system in the overall scheme of securities regulation.