Working Paper: CEPR ID: DP11690
Authors: Giovanni Cespa; Paolo Colla
Abstract: We study insider trading disclosure in a dynamic model where a security is traded in two venues by an insider together with noise traders, and prices are set by competitive dealers in each location, under two alternative information regimes. We first posit that markets are informationally segmented, in that market makers are privy to the information gathered in their venue. In this case, fragmentation has no effect on the price discovery impact of insider trades’ disclosure. We then allow market makers in a given venue to also observe the other venue’s past period price as well as a noisy signal of that venue’s order flow. In this case, we show that if markets are sufficiently pre-trade transparent, disclosure can impair price discovery.
Keywords: fragmentation; disclosure of insider trades; dissimulation; market transparency; informational efficiency; price comovement
JEL Codes: G10; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| insider trade disclosure (G14) | price discovery (D47) |
| mandatory disclosure improves price discovery (G14) | price informativeness in each market (G14) |
| transient camouflage (F22) | price discovery (D47) |
| increased transparency (G38) | market efficiency (G14) |
| disclosure increases correlation across asset prices (G19) | correlation driven by insider dissimulation strategy (C73) |