The Impact of Illegal Insider Trading in Dealer and Specialist Markets: Evidence from a Natural Experiment

Posted: 29 Aug 2003

See all articles by Raymond P.H. Fishe

Raymond P.H. Fishe

University of Richmond - E. Claiborne Robins School of Business

Michel A. Robe

University of Richmond - E. Claiborne Robins School of Business

Abstract

We examine insider trading in specialist and dealer markets, using the trades of stock brokers who had advance copies of a stock analysis column in Business Week magazine. We find that increases in price and volume occur after informed trades. During informed trading, market makers decrease depth. Depth falls more on the NYSE and Amex than on the Nasdaq. Spreads increase on the NYSE and Amex, but not on the Nasdaq. We find none of these pre-release changes in a nontraded control sample of stocks mentioned in the column. Our results show that insider trading has a negative impact on market liquidity; depth is an important tool to manage asymmetric information risk; and specialist markets are better at detecting informed trades.

Keywords: Insider Trading, Depth, Liquidity, Specialist and Dealer Markets

JEL Classification: G12, G14, K22, D82

Suggested Citation

Fishe, Raymond P.H. and Robe, Michel A., The Impact of Illegal Insider Trading in Dealer and Specialist Markets: Evidence from a Natural Experiment. Journal of Financial Economics, Vol.71, No.3, pp. 461-88, March 2004, Available at SSRN: https://ssrn.com/abstract=431900

Raymond P.H. Fishe

University of Richmond - E. Claiborne Robins School of Business ( email )

1 Gateway Road
Richmond, VA 23173
United States
804-289-8549 (Phone)

Michel A. Robe (Contact Author)

University of Richmond - E. Claiborne Robins School of Business ( email )

Richmond, VA 23173
United States

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