Trading Prior to Price Sensitive Announcements

Abstract

We develop and test a proxy for the level of informed trading based on trading prior to Price Sensitive Announcements (PSAs). Significant price movements prior to the release of PSAs trigger an Informed Trading Alert (ITA). We calculate our Informed Trading Proxy (ITP), which is the ratio of ITAs to PSAs, for the Australian Securities Exchange (ASX) and three Chinese exchanges. From 2003 to 2008, we see almost a tripling in the incidence of informed trading prior to the release of PSAs on the ASX. Using ITP as a proxy for market integrity these results suggest that the integrity of the ASX market has reduced over the period 2003 to 2008. Notwithstanding, the integrity of the ASX marketplace appears higher relative to that of three Chinese peer exchanges.

Keywords: Market Quality, Market Integrity, Informed Trading, ASX, Chinese Exchanges, Regulation

JEL Classification: G15