Photo credit: Jim Young/Bloomberg
The Financial Times has reported on the research paper ‘Using ETFs to Conceal Insider Trading’ written by Elza Eglite from Stockholm School of Economics in Riga, Dans Štaermans, economist at Latvijas Banka, and UTS Finance Department academics Associate Professor Vinay Patel and Professor Talis Putnins.
The research shows that exchange-traded funds (ETFs) are used in a new form of insider trading known as ‘shadow trading.’
Evidence suggests that some traders in possession of material non-public information about upcoming M&A announcements trade in ETFs that contain the target stock, rather than trading the underlying company shares, thereby concealing their insider trading.
Using bootstrap techniques to identify abnormal trading in treatment and control samples, the researchers find significant levels of shadow trading in 3-6% of same-industry ETFs prior to M&A announcements, equating to at least $212 million of such trading per annum.
The findings suggest insider trading is more pervasive than just the ‘direct’ forms that have been the focus of research and enforcement to date.