Strategic insider trading: Disguising order flows to escape trading competition

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...

Full description

Saved in:
Bibliographic Details
Published in:Journal of corporate finance (Amsterdam, Netherlands) Netherlands), 2021-04, Vol.67, p.101891, Article 101891
Main Authors: Gu, Dingwei, Liu, Xin, Sun, Hanwen, Zhao, Huainan
Format: Article
Language:English
Subjects:
Cautious strategy
Insider trading
Order flows
Short selling
Trading competition
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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. •Short sellers actively exploit trading opportunities from insider sales.•Insiders strategically disguise their order flows to escape trading competition.•Order flow disguise includes splitting sales over time and reducing initial sales.•We highlight the strategic interaction between insiders and short sellers.
ISSN:0929-1199
1872-6313
DOI:10.1016/j.jcorpfin.2021.101891