Strategic Insider Trading: Disguising Order Flows to Escape Trading Competition

Dingwei Gu; Xin Liu; Hanwen Sun; Huainan Zhao

doi:10.1016/j.jcorpfin.2021.101891

Strategic Insider Trading: Disguising Order Flows to Escape Trading Competition

Dingwei Gu, Xin Liu, Hanwen Sun, Huainan Zhao

Research output: Contribution to journal › Article › peer-review

3 Citations (SciVal)

74 Downloads (Pure)

Abstract

Short sellers actively exploit trading opportunities from insider sales. We argue that, in response to concern about potential order flow information leakage, insiders strategically disguise their order flows to escape trading competition. Our model predicts that, when short sellers are sensitive to order flow information, insiders are more likely to adopt a cautious trading strategy, i.e., splitting their trades over time. Empirically, we identify cautious trading by tracking consecutive transactions at the insider-strategy level. We find that, when anticipating intensive short selling potential, (1) insiders tend to trade cautiously; and (2) cautious insiders tend to reduce their initial trades. Overall, we highlight the strategic interaction between insiders and short sellers on the diffusion of order flow information.

Original language	English
Article number	101891
Journal	Journal of Corporate Finance
Volume	67
Early online date	8 Jan 2021
DOIs	https://doi.org/10.1016/j.jcorpfin.2021.101891
Publication status	Published - 30 Apr 2021

Funding

The feedback and advice from Douglas Cumming (the editor) and two anonymous referees are gratefully acknowledged. We thank Mike Adams, Wenxuan Hou, Shiyang Huang, Jiao Ji, Yihan Li, Dong Lou, Roni Michaely, David Newton, Huihua Nie, Vesa Pursiainen, Volker Seiler, Rui Tian, Cong Wang, Yue Xiang, Ru Xie, Qijing Yang, Ania Zalewska, Cheng (Colin) Zeng, Weinan Zheng, all seminar participants at University of Bath, Loughborough University, Renmin University of China, Zhongnan University of Economics Law, University of Birmingham, Brunel University, Shandong University of Finance and Economics, Shanghai Lixin 2018 Corporate Finance Workshop for helpful comments. Dingwei Gu is grateful for the research support from The Hong Kong University of Science and Technology . This research was partly done during his time at The Hong Kong University of Science and Technology. Hanwen Sun and Dingwei Gu acknowledge funding support from the British Academy Newton Grant ( NMG2R3\100018 ). All remaining erros are our own.

Funders	Funder number
British Academy Newton	NMG2R3\100018
Chongqing University of Science and Technology

Keywords

Cautious strategy
Insider trading
Order flows
Short selling
Trading competition

ASJC Scopus subject areas

Economics and Econometrics
Business and International Management
Finance
Strategy and Management

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10.1016/j.jcorpfin.2021.101891

20210102_Revised_Manuscript.PDFAccepted author manuscript, 941 KBLicence: CC BY-NC-ND

Cite this

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title = "Strategic Insider Trading: Disguising Order Flows to Escape Trading Competition",

abstract = "Short sellers actively exploit trading opportunities from insider sales. We argue that, in response to concern about potential order flow information leakage, insiders strategically disguise their order flows to escape trading competition. Our model predicts that, when short sellers are sensitive to order flow information, insiders are more likely to adopt a cautious trading strategy, i.e., splitting their trades over time. Empirically, we identify cautious trading by tracking consecutive transactions at the insider-strategy level. We find that, when anticipating intensive short selling potential, (1) insiders tend to trade cautiously; and (2) cautious insiders tend to reduce their initial trades. Overall, we highlight the strategic interaction between insiders and short sellers on the diffusion of order flow information. ",

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Strategic Insider Trading: Disguising Order Flows to Escape Trading Competition

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Strategic Insider Trading: A balancing act between information flows and trading competition

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Strategic Insider Trading: Disguising Order Flows to Escape Trading Competition

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Strategic Insider Trading: A balancing act between information flows and trading competition

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