Advanced Search
MyIDEAS: Login to save this article or follow this journal

Strategic trading in the wrong direction by a large institutional insider

Contents:

Author Info

  • Giambona, Erasmo
  • Golec, Joseph
Registered author(s):

    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.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.sciencedirect.com/science/article/B6VFG-4X5JSR2-1/2/cefcd5a4b69398420bd943716afff751
    Download Restriction: Full text for ScienceDirect subscribers only

    As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Empirical Finance.

    Volume (Year): 17 (2010)
    Issue (Month): 1 (January)
    Pages: 1-22

    as in new window
    Handle: RePEc:eee:empfin:v:17:y:2010:i:1:p:1-22

    Contact details of provider:
    Web page: http://www.elsevier.com/locate/jempfin

    Related research

    Keywords: Strategic trading Manipulation Institutional investor Insider;

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Antoine Faure-Grimaud, 2004. "Public Trading and Private Incentives," Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 985-1014.
    2. Alexander, Gordon J. & Peterson, Mark A., 2007. "An analysis of trade-size clustering and its relation to stealth trading," Journal of Financial Economics, Elsevier, vol. 84(2), pages 435-471, May.
    3. Saar, Gideon, 2001. "Price Impact Asymmetry of Block Trades: An Institutional Trading Explanation," Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 1153-81.
    4. Sugato Chakravarty, 2002. "Stealth-Trading: Which Traders' Trades Move Stock Prices?," Finance 0201003, EconWPA.
    5. Fidrmucova, J. & Goergen, M. & Renneboog, L.D.R., 2005. "Insider Trading, News Releases and Ownership Concentration," Discussion Paper 2005-025, Tilburg University, Tilburg Law and Economic Center.
    6. Admati, Anat R & Ross, Stephen A, 1985. "Measuring Investment Performance in a Rational Expectations Equilibrium Model," The Journal of Business, University of Chicago Press, vol. 58(1), pages 1-26, January.
    7. Keim, Donald B. & Madhavan, Ananth, 1995. "Anatomy of the trading process Empirical evidence on the behavior of institutional traders," Journal of Financial Economics, Elsevier, vol. 37(3), pages 371-398, March.
    8. Khwaja, Asim Ijaz & Mian, Atif, 2005. "Unchecked intermediaries: Price manipulation in an emerging stock market," Journal of Financial Economics, Elsevier, vol. 78(1), pages 203-241, October.
    9. Michael Faulkender & Mitchell A. Petersen, 2006. "Does the Source of Capital Affect Capital Structure?," Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 45-79.
    10. Holthausen, Robert W. & Leftwich, Richard W. & Mayers, David, 1990. "Large-block transactions, the speed of response, and temporary and permanent stock-price effects," Journal of Financial Economics, Elsevier, vol. 26(1), pages 71-95, July.
    11. Verbeek, M.J.C.M. & Nijman, T.E., 1992. "Incomplete panels and selection bias: A survey," Discussion Paper 1992-7, Tilburg University, Center for Economic Research.
    12. Archishman Chakraborty & Bilge Yilmaz, . "Informed Manipulation," Rodney L. White Center for Financial Research Working Papers 07-00, Wharton School Rodney L. White Center for Financial Research.
    13. Carhart, Mark M, 1997. " On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    14. Holthausen, Robert W. & Leftwich, Richard W. & Mayers, David, 1987. "The effect of large block transactions on security prices: A cross-sectional analysis," Journal of Financial Economics, Elsevier, vol. 19(2), pages 237-267, December.
    15. Chan, Louis K C & Lakonishok, Josef, 1995. " The Behavior of Stock Prices around Institutional Trades," Journal of Finance, American Finance Association, vol. 50(4), pages 1147-74, September.
    16. Verbeek, M. & Nijman, T., 1990. "Testing For Selectivity Bias In Panel Data Models," Papers 9018, Tilburg - Center for Economic Research.
    17. Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 503-29.
    18. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
    19. Germain, Laurent, 2005. "Strategic noise in competitive markets for the sale of information," Journal of Financial Intermediation, Elsevier, vol. 14(2), pages 179-209, April.
    20. Furfine, Craig, 2007. "When is inter-transaction time informative?," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 310-332, June.
    21. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    22. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
    23. Chiraphol N. Chiyachantana & Pankaj K. Jain & Christine Jiang & Robert A. Wood, 2004. "International Evidence on Institutional Trading Behavior and Price Impact," Journal of Finance, American Finance Association, vol. 59(2), pages 869-898, 04.
    24. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
    25. Gemmill, Gordon, 1996. " Transparency and Liquidity: A Study of Block Trades on the London Stock Exchange under Different Publication Rules," Journal of Finance, American Finance Association, vol. 51(5), pages 1765-90, December.
    26. Merrick, John Jr & Naik, Narayan Y. & Yadav, Pradeep K., 2005. "Strategic trading behavior and price distortion in a manipulated market: anatomy of a squeeze," Journal of Financial Economics, Elsevier, vol. 77(1), pages 171-218, July.
    27. John, Kose & Narayanan, Ranga, 1997. "Market Manipulation and the Role of Insider Trading Regulations," The Journal of Business, University of Chicago Press, vol. 70(2), pages 217-47, April.
    28. Fishman, Michael J & Hagerty, Kathleen M, 1995. "The Mandatory Disclosure of Trades and Market Liquidity," Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 637-76.
    29. Chan, Louis K. C. & Lakonishok, Josef, 1993. "Institutional trades and intraday stock price behavior," Journal of Financial Economics, Elsevier, vol. 33(2), pages 173-199, April.
    30. Sassan Alizadeh & Michael W. Brandt & Francis X. Diebold, 2002. "Range-Based Estimation of Stochastic Volatility Models," Journal of Finance, American Finance Association, vol. 57(3), pages 1047-1091, 06.
    31. Olsen, Randall J, 1980. "A Least Squares Correction for Selectivity Bias," Econometrica, Econometric Society, vol. 48(7), pages 1815-20, November.
    32. Huddart, Steven & Hughes, John S & Levine, Carolyn B, 2001. "Public Disclosure and Dissimulation of Insider Trades," Econometrica, Econometric Society, vol. 69(3), pages 665-81, May.
    33. Jarrow, Robert A., 1992. "Market Manipulation, Bubbles, Corners, and Short Squeezes," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(03), pages 311-336, September.
    34. Jiang, Guolin & Mahoney, Paul G. & Mei, Jianping, 2005. "Market manipulation: A comprehensive study of stock pools," Journal of Financial Economics, Elsevier, vol. 77(1), pages 147-170, July.
    35. Francis Vella, 1998. "Estimating Models with Sample Selection Bias: A Survey," Journal of Human Resources, University of Wisconsin Press, vol. 33(1), pages 127-169.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:eee:empfin:v:17:y:2010:i:1:p:1-22. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.