Showing papers on "Electronic trading published in 1980"

Asymmetrical Information in Securities Markets and Trading Volume

Abstract: Unequal costs of obtaining and processing information may lead to trading of securities and wealth redistributions among investors Those investors with easy access to information about a firm may be able to profit from prior knowledge of the information before public release Public policy making bodies such as the SEC have attempted to alleviate this phenomenon by promoting public disclosure of information through litigation and regulation of the trading activities of insiders Whether these procedures have been successful in curtailing trading due to privileged information is still open to debate Academicians have also been concerned with resolving the existence of asymmetrically distributed information and “efficient markets” In spite of the social and academic importance of this phenomenon, there has been little empirical work in this area This is primarily due to a lack of a testable theoretical framework explaining investor behavior in securities markets with asymmetric information distribution The ensuing paper provides a tentative testable theory on trading in markets with asymmetrically distributed information as well as an empirical investigation of this theory

The battle of insider trading vs. market efficiency

Abstract: T his study attempts to determine the extent to which an apparentmarket inefficiency is corrected following public recognition of its existence. For example, studies by Pratt and DeVere [14] and Jaffe [7] have shown both that an investor can achieve abnormally high rates of return relative to the market if he purchases stocks previously purchased by corporate insiders and that those abnormal returns persist over periods of up to two years. If these studies are valid, and if this market inefficiency did in fact exist, then the efficient market hypothesis implies that the inefficiency should disappear once the findings are publicly announced and investors become aware of the opportunities offered by following insider decisions. This study intends to test such a presumption. That individuals possessing confidential information (insiders) can and do make above-average returns by trading in stocks of their own companies has been demonstrated and corroborated by several investigators. Lorie and Niederhoffer [13] found that intensive buying seems to indicate that the stock is likely to outperform the market during the following six months, while Pratt and DeVere [14] found that, during the six year span 1960-1966, insiders not only outperformed the market but produced greater “excess” returns on purchases than on sales. Zweig [22] later showed that stocks that exhibited heavy insider buying activity increased in price faster than the market average during market upswings and declined slower in market downswings. Analyzing transactions from 1962-68, Jaffe [7] concluded that insiders do possess special information that allows them to outperform the market. Finally, in a study designed to show the rate of return for the ”average” insider, Finnerty [3] found 47 8 2 that the bulk of the excess return was earned in the first six months.’ These results imply that insiders are able to predict, to some degree, the price performance of their firm’s stock relative to the market. Although these studies provide convincing evidence of the potential for insider profitability-and hence, provide a refutation of the strong form of the efficient markets hypothesis (EMH) little research exists that deals with the potential for non-insiders to earn excess profits by using public information concerning insider transactions. Only Jaffe provides evidence on a risk-adjusted basis to show that non-

How to profit from insider trading information

Abstract: T he investment community has persistently believed that insiders, who are officers, directors, or owners of 10% or more of the common stock of a publicly-owned U. S. corporation, have access to potentially valuable information about their firm’s prospects. Therefore, numerous studies have concentrated on the usefulness and predictability of insider trading. They have, however, had inconclusive results, with some indications that insiders do possess valuable information that they may use to benefit themselves. One major shortcoming of previous studies is that they have relied almost exclusively on trading in securities listed on the American and New York exchanges, where information is generated, disseminated, and discounted very rapidly, thus precluding most opportunities for profitable trading based on insiders’ informa tion.