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Insider networks

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Abstract

How do insiders respond to regulatory oversight? History suggests that they form sophisticated networks to share information and circumvent regulation. We develop a theory of the formation and regulation of information transmission networks. We show that agents with sufficiently complex networks bypass any given regulatory environment. In response, regulators employ broad regulatory boundaries to combat gaming, giving rise to regulatory ambiguity. Tighter regulation induces agents to migrate transmission activity from existing social networks to a core-periphery insider network. A small group of agents endogenously arise as intermediaries for the bulk of information. We provide centrality measures that identify intermediaries.

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  • Selman Erol & Michael Junho Lee, 2018. "Insider networks," Staff Reports 862, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:862
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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. Bloch, Francis & Dutta, Bhaskar, 2009. "Communication networks with endogenous link strength," Games and Economic Behavior, Elsevier, vol. 66(1), pages 39-56, May.
    3. 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.
    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

    network formation; endogenous intermediation; regulatory ambiguity; insider trading;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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