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Insider Networks

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Abstract

Modern-day financial systems are highly complex, with billions of exchanges in information, assets, and funds between individuals and institutions. Though daunting to operationalize, regulating these transmissions may be desirable in some instances. For example, securities regulators aim to protect investors by tracking and punishing insider trading. Recent evidence shows that insiders have formed sophisticated networksthat enable them to pursue activities outside the purview of regulatory oversight. In understanding the cat-and-mouse game between regulators and insiders, a key consideration is the networks that insiders might form in order to circumvent regulation, and how regulators might cope with insiders’ tactics. In this post, we introduce a theoretical framework that considers network formation in response to regulation and review the key insights.

Suggested Citation

  • Selman Erol & Michael Junho Lee, 2020. "Insider Networks," Liberty Street Economics 20200625, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:88224
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    References listed on IDEAS

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    1. , & , & ,, 2014. "Dynamics of information exchange in endogenous social networks," Theoretical Economics, Econometric Society, vol. 9(1), January.
    2. Peter M. DeMarzo & Michael J. Fishman & Kathleen M. Hagerty, 1998. "The Optimal Enforcement of Insider Trading Regulations," Journal of Political Economy, University of Chicago Press, vol. 106(3), pages 602-632, June.
    3. Bloch, Francis & Dutta, Bhaskar, 2009. "Communication networks with endogenous link strength," Games and Economic Behavior, Elsevier, vol. 66(1), pages 39-56, May.
    4. Ahern, Kenneth R., 2017. "Information networks: Evidence from illegal insider trading tips," Journal of Financial Economics, Elsevier, vol. 125(1), pages 26-47.
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    More about this item

    Keywords

    insider trading; money laundering; capital controls; transmission networks; regulation;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance
    • G1 - Financial Economics - - General Financial Markets

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