IDEAS home Printed from https://ideas.repec.org/a/eee/empfin/v17y2010i1p1-22.html
   My bibliography  Save this article

Strategic trading in the wrong direction by a large institutional insider

Author

Listed:
  • Giambona, Erasmo
  • Golec, Joseph

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.

Suggested Citation

  • Giambona, Erasmo & Golec, Joseph, 2010. "Strategic trading in the wrong direction by a large institutional insider," Journal of Empirical Finance, Elsevier, vol. 17(1), pages 1-22, January.
    • Handle: RePEc:eee:empfin:v:17:y:2010:i:1:p:1-22
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927-5398(09)00063-2
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Fama, Eugene F & French, Kenneth R, 1992. "The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-465, June.
    2. Chakraborty, Archishman & Yilmaz, Bilge, 2004. "Informed manipulation," Journal of Economic Theory, Elsevier, vol. 114(1), pages 132-152, January.
    3. 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.
    4. Chakravarty, Sugato, 2001. "Stealth-trading: Which traders' trades move stock prices?," Journal of Financial Economics, Elsevier, vol. 61(2), pages 289-307, August.
    5. Jana P. Fidrmuc & Marc Goergen & Luc Renneboog, 2006. "Insider Trading, News Releases, and Ownership Concentration," Journal of Finance, American Finance Association, vol. 61(6), pages 2931-2973, December.
    6. 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.
    7. Verbeek, Marno & Nijman, Theo, 1992. "Testing for Selectivity Bias in Panel Data Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(3), pages 681-703, August.
    8. 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.
    9. 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.
    10. Robert A. Jarrow, 2008. "Market Manipulation, Bubbles, Corners, and Short Squeezes," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 6, pages 105-130, World Scientific Publishing Co. Pte. Ltd..
    11. repec:bla:jfinan:v:59:y:2004:i:2:p:869-898 is not listed on IDEAS
    12. 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.
    13. 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.
    14. 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.
    15. Saar, Gideon, 2001. "Price Impact Asymmetry of Block Trades: An Institutional Trading Explanation," The Review of Financial Studies, Society for Financial Studies, vol. 14(4), pages 1153-1181.
    16. 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.
    17. Olsen, Randall J, 1980. "A Least Squares Correction for Selectivity Bias," Econometrica, Econometric Society, vol. 48(7), pages 1815-1820, November.
    18. 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, June.
    19. Antoine Faure-Grimaud, 2004. "Public Trading and Private Incentives," The Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 985-1014.
    20. Michael Faulkender & Mitchell A. Petersen, 2006. "Does the Source of Capital Affect Capital Structure?," The Review of Financial Studies, Society for Financial Studies, vol. 19(1), pages 45-79.
    21. Nijman, T.E. & Verbeek, M.J.C.M., 1992. "Testing for selectivity in panel data models," Other publications TiSEM 7ec34a6c-1d84-4052-971c-d, Tilburg University, School of Economics and Management.
    22. 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 217-247, April.
    23. 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 1765-1790, December.
    24. Carhart, Mark M, 1997. "On Persistence in Mutual Fund Performance," Journal of Finance, American Finance Association, vol. 52(1), pages 57-82, March.
    25. Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," The Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 503-529.
    26. 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.
    27. 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.
    28. Furfine, Craig, 2007. "When is inter-transaction time informative?," Journal of Empirical Finance, Elsevier, vol. 14(3), pages 310-332, June.
    29. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    30. Bertsimas, Dimitris & Lo, Andrew W., 1998. "Optimal control of execution costs," Journal of Financial Markets, Elsevier, vol. 1(1), pages 1-50, April.
    31. 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.
    32. Huddart, Steven & Hughes, John S & Levine, Carolyn B, 2001. "Public Disclosure and Dissimulation of Insider Trades," Econometrica, Econometric Society, vol. 69(3), pages 665-681, May.
    33. 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.
    34. 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 1147-1174, September.
    35. 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.
    36. Fishman, Michael J & Hagerty, Kathleen M, 1995. "The Mandatory Disclosure of Trades and Market Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 8(3), pages 637-676.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lien, Donald & Hung, Pi-Hsia & Lin, Zong-Wei, 2020. "Whose trades move stock prices? Evidence from the Taiwan Stock Exchange," International Review of Economics & Finance, Elsevier, vol. 66(C), pages 25-50.
    2. Mudalige, Priyantha & Duong, Huu Nhan & Kalev, Petko S. & Gupta, Kartick, 2020. "Who trades in competing firms around earnings announcements," Pacific-Basin Finance Journal, Elsevier, vol. 59(C).
    3. Donald Lien & Pi-Hsia Hung, 2023. "Whose trades contribute more to price discovery? Evidence from the Taiwan stock exchange," Review of Quantitative Finance and Accounting, Springer, vol. 61(1), pages 213-263, July.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Joseph Golec, 2007. "Are the Insider Trades of a Large Institutional Investor Informed?," The Financial Review, Eastern Finance Association, vol. 42(2), pages 161-190, May.
    2. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 4, July-Dece.
    3. Hatheway, Frank & Kwan, Amy & Zheng, Hui, 2017. "An Empirical Analysis of Market Segmentation on U.S. Equity Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 52(6), pages 2399-2427, December.
    4. Aktas, Osman Ulas & Kryzanowski, Lawrence, 2014. "Market impacts of trades for stocks listed on the Borsa Istanbul," Emerging Markets Review, Elsevier, vol. 20(C), pages 152-175.
    5. Murphy Jun Jie Lee, 2013. "The Microstructure of Trading Processes on the Singapore Exchange," PhD Thesis, Finance Discipline Group, UTS Business School, University of Technology, Sydney, number 2-2013, January-A.
    6. Tālis J. Putniņš, 2012. "Market Manipulation: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 26(5), pages 952-967, December.
    7. Alex Frino & Andrew Lepone & Grace Lepone, 2019. "Price Impact of Corporate Bond Trading: Evidence from the Australian Securities Exchange," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 22(03), pages 1-22, September.
    8. Campbell, John Y. & Ramadorai, Tarun & Schwartz, Allie, 2009. "Caught on tape: Institutional trading, stock returns, and earnings announcements," Journal of Financial Economics, Elsevier, vol. 92(1), pages 66-91, April.
    9. Anna Obizhaeva, 2009. "Portfolio Transitions and Stock Price Dynamics," Working Papers w0224, New Economic School (NES).
    10. Anna Obizhaeva, 2009. "Portfolio Transitions and Stock Price Dynamics," Working Papers w0224, Center for Economic and Financial Research (CEFIR).
    11. Alzahrani, Ahmed A. & Gregoriou, Andros & Hudson, Robert, 2013. "Price impact of block trades in the Saudi stock market," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 23(C), pages 322-341.
    12. Brennan, Michael J. & Chordia, Tarun & Subrahmanyam, Avanidhar & Tong, Qing, 2012. "Sell-order liquidity and the cross-section of expected stock returns," Journal of Financial Economics, Elsevier, vol. 105(3), pages 523-541.
    13. Chakraborty, Archishman & Yilmaz, Bilge, 2004. "Manipulation in market order models," Journal of Financial Markets, Elsevier, vol. 7(2), pages 187-206, February.
    14. Lee, Eun Jung & Eom, Kyong Shik & Park, Kyung Suh, 2013. "Microstructure-based manipulation: Strategic behavior and performance of spoofing traders," Journal of Financial Markets, Elsevier, vol. 16(2), pages 227-252.
    15. Obizhaeva, Anna A. & Wang, Jiang, 2013. "Optimal trading strategy and supply/demand dynamics," Journal of Financial Markets, Elsevier, vol. 16(1), pages 1-32.
    16. Robert Almgren, 2003. "Optimal execution with nonlinear impact functions and trading-enhanced risk," Applied Mathematical Finance, Taylor & Francis Journals, vol. 10(1), pages 1-18.
    17. Agarwalla, Sobhesh Kumar & Pandey, Ajay, 2010. "Price Impact of Block Trades and Price Behavior Surrounding Block Trades in Indian Capital Market," IIMA Working Papers WP2010-04-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
    18. Archishman Chakraborty & Bilge Yilmaz, "undated". "Nested Information and Manipulation in Financial Markets," Rodney L. White Center for Financial Research Working Papers 6-00, Wharton School Rodney L. White Center for Financial Research.
    19. Murgia, Maurizio & Pinna, Andrea & Gottardo, Pietro & Bosetti, Luisella, 2019. "The impact of large orders in electronic markets," International Review of Economics & Finance, Elsevier, vol. 59(C), pages 174-192.
    20. Frino, Alex & Jarnecic, Elvis & Johnstone, David & Lepone, Andrew, 2005. "Bid-ask bounce and the measurement of price behavior around block trades on the Australian Stock Exchange," Pacific-Basin Finance Journal, Elsevier, vol. 13(3), pages 247-262, June.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. 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.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jempfin .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.