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The Impact of Insider Trading on the Secondary Market with Order-Driven System

  • Xianfeng Jiang

    (School of Finance, Dongbei University of Finance and Economics)

  • Yongdong Shi

    (Research Center for Applied Finance, Dongbei University)

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    Combining Leland (1992), Madhavan (1992) and Repullo (1999) and under the framework of Rational Expectation Equilibrium (REE), the paper analyzes the impact of insider trading on the secondary market with order-driven system. We show that when insider trading is allowed, the average price will not change and there is a positive correlation between the future price and the current price. The volatility and liquidity change on uncertain directions with insider trading. With or without insider trading, the price will be efficient in some special cases. The insider is benefited by insider trading, while, the outsider and liquidity trader may be benefited or hurt by insider trading.

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    Article provided by Society for AEF in its journal Annals of Economics and Finance.

    Volume (Year): 7 (2006)
    Issue (Month): 1 (May)
    Pages: 129-143

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    Handle: RePEc:cuf:journl:y:2006:v:7:i:1:p:129-143
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    1. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
    2. Jain, Neelam & Mirman, Leonard J., 2002. "Effects of insider trading under different market structures," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(1), pages 19-39.
    3. Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
    4. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    5. Ananth N. Madhavan, . "Trading Mechanisms in Securities Markets," Rodney L. White Center for Financial Research Working Papers 16-90, Wharton School Rodney L. White Center for Financial Research.
    6. Glosten, Lawrence R, 1989. "Insider Trading, Liquidity, and the Role of the Monopolist Specialist," The Journal of Business, University of Chicago Press, vol. 62(2), pages 211-35, April.
    7. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
    8. Utpal Bhattacharya & Hazem Daouk, 2002. "The World Price of Insider Trading," Journal of Finance, American Finance Association, vol. 57(1), pages 75-108, 02.
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