1 The Impact of Illegal Insider Trading in Dealer and Specialist Markets: Evidence from a Natural Experiment Raymond P.H. Fishe and Michel A. Robe School of Business Administration Kogod School of Business University of Miami American University P.O. Box 248126 4400 Massachusetts Avenue, NW Coral Gables, FL 33124 Washington, DC 20016 pfishe@miami.edu mrobe@american.edu (305) 284-4397 (202) 885-1880 January 2002 The authors thank the officials at the Securities and Exchange Commission and the U.S. Attorney’s Office in New York for assistance wit h the study. The authors thank Jim Angel, Henk Berkman, Graeme Camp, Jeff Harris, Kris Jacobs, Tim McCormick, Ron Melicher, Albert Minguet, David Reeb, and seminar participants at the NASD, the University of Auckland, McGill University, and the 2001 Meetings of the European Finance Association (Barcelona) and of the Fi nancial Manageme nt Association (Toronto ) for helpful comme nts. They are grateful to Tim McCormick for help in obtaining aggregate depth data for Nasdaq-listed stocks. This work began while Pat Fishe was a Visiting Academic Scholar at the Securities and Exchange Commission. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the authors and do not necessarily reflect the views of the Commission or the authors’ colleagues upon the staff of the Commission. Michel Robe would like to acknowledge the support received as a Kogod Endowed Research Fellow. Xinxin Wang provided valuable research assistance. The authors are responsible for all errors and omissions.
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The authors thank the officials at the Securities and Exchange Commission and the U.S. Attorney’s Office in NewYork for assistance with the study. The authors thank Jim Angel, Henk Berkman, Graeme Camp, Jeff Harris, KrisJacobs, Tim McCormick, Ron Melicher, Albert Minguet, David Reeb, and seminar participants at the NASD, theUniversity of Auckland, McGill University, and the 2001 Meetings of the European Finance Association(Barcelona) and of the Financial Management Association (Toronto) for helpful comments. They are grateful toTim McCormick for help in obtaining aggregate depth data for Nasdaq-listed stocks. This work began while PatFishe was a Visiting Academic Scholar at the Securities and Exchange Commission. The Securities and ExchangeCommission, as a matter of policy, disclaims responsibility for any private publication or statement by any of itsemployees. The views expressed herein are those of the authors and do not necessarily reflect the views of theCommission or the authors’ colleagues upon the staff of the Commission. Michel Robe would like to acknowledgethe support received as a Kogod Endowed Research Fellow. Xinxin Wang provided valuable research assistance.The authors are responsible for all errors and omissions.
The Impact of Illegal Insider Trading in Dealer and Specialist Markets:
Evidence from a Natural Experiment
Abstract
This paper provides direct evidence on market makers’ reaction tounambiguously informed trading in specialist versus dealer markets. Usingthe trades of stockbrokers who had advance copies of a stock analysis
column in Business Week magazine, we document that increases in price andvolume occur after informed trades and before public release of theinformation, especially for Nasdaq stocks. Both quoted and effective bid-ask spreads are unaffected by informed trades. Instead, market makers adjust thedepth at the ask quotes as the information leads to more buys. Quoted depthfalls once insider trading begins and then rebounds after it ends, generally toabove its initial level. Ask depth falls relatively more on the NYSE andAMEX than on the Nasdaq, which suggests that specialist markets detectinformed trading more readily. None of these pre-release changes areobserved in a control sample of stocks that were mentioned in the column butnot traded by these stockbrokers. Overall, our results show that illegal insider trading has a negative impact on market liquidity and that market makers use
depth as the tool to manage asymmetric information risk during unexpectedinsider trading episodes.
JEL-Classification: G12, G14, K22, D82
Keywords: Insider Trading, Asymmetric Information, Depth, Liquidity,Specialist vs. Dealer Market, Business Week
specialist markets are better equipped to detect such trading (cf., Heidle and Huang, 2002).
The events analyzed here were publicly revealed in January 1999, when the SEC charged
five stockbrokers with insider trading on misappropriated nonpublic information from Business
Week magazine.2 The SEC alleged that one of the brokers, Larry Smath, paid foremen of the
local Business Week distributor, Hudson News Co., to fax him advance copies of Gene Marcial’s
IWS column. He obtained this information in the early afternoon on Thursdays, before the public
release of portions of the magazine over news wire (typically at 5:15 PM the same day) and
electronic distribution on America Online (at 7 PM). Smath was able to forward it to the other
brokers and they were able to enter trades before the markets had closed. The SEC charged that
this scheme involved trades in at least 39 different stocks between June 1995 and January 1996,
and apparently ended only because officials at Business Week noticed unusual trading in some of
the recommended stocks before the magazine’s release.3
In all, the defendants, members of their
families and some of their clients bought $7.73 million worth of securities mentioned in the IWS
column, accounting for about 5 percent of total Thursday trading in the affected stocks.4
This case is of general interest because it offers a close-up view of market making during
numerous episodes of unambiguously informed trading. For every stock traded by the insiders,
as well as for most of the stocks mentioned in the IWS column that the insiders did not trade, we
have data about all transactions (trade time, volume and price, execution market) and quotes (bid
and ask prices, quoted bid and ask depths) for three days around the insider trading day, which
was always a Thursday. Court records from the civil and criminal cases brought against the
brokers identify their trades within the transaction stream. By aggregating and analyzing the
trade and quote data in 15-minute intervals, we obtain a detailed picture of investors’ and market
makers’ behavior during, and immediately following, periods of insider trading activity.
2 See e.g. “Group of Brokers is Facing Charges of Insider Trading,” The New York Times, January 28, 1999, p. C-21.3 See “Is Someone Sneaking a Peek at Business Week? Early Trading of a Few Inside Wall Street Stocks Raises aRed Flag,” by Chris Welles, Business Week , February 5, 1996.4 Smath and two other brokers pled guilty to one felony count each. Another broker, Joseph Falcone, was convictedof insider trading on November 9, 1999, following a 1 1/2-week trial. The fifth broker cited in the SEC complaintwas never criminally charged; neither were the brokers' associates.
A key question examined in this study is how informed trades affect market liquidity. A
basic tenet of market microstructure theory is that liquidity partially reflects the information
asymmetry created by informed traders (Madhavan, 2000). Most microstructure models focus on
bid-ask spreads as the tool to react to informed trading (e.g., Glosten and Milgrom, 1985;
Glosten, 1989; Easley and O’Hara, 1992). Only recently have models explored whether market
makers may change quoted depth as well as spreads in response to perceived increases in insider
trading (Kavajecz, 1998; Dupont, 2000).
Recent empirical work indicates that both spreads and depth are affected by expected
information events.5 A natural question, however, is whether spreads or depth also react to
unexpected changes in informed trading. To date, the sole evidence comes from case studies of
two NYSE-traded stocks that were targeted by corporate insiders in the early 1980’s (Cornell and
Sirri, 1992; Chakravarty and McConnell, 1997). Those authors find that liquidity, if anything,
improves during insider trading episodes. Our findings are the first broader-sample evidence that
genuinely informed trading has a negative impact on market liquidity. Further, our results
indicate that market makers do not (or perhaps cannot) increase spreads in response to informed
trading but do have the wherewithal to decrease depth. This result, which holds for Exchange-
listed and (to a lesser extent) Nasdaq stocks, provides partial support for recent theoretical results
(Dupont, 2000) that, in a specialist market, depth should react proportionally more than spreads
to changes in informed trading.6
Specifically, we document that neither quoted nor effective spreads are affected by the
arrival of informed trades, and establish this result for both specialist and dealer markets. Instead,
we find that market makers limit their exposure to informed traders by reducing quoted depth.
The data show that depth at the asked quote decreases during intervals of insider buying activity,
5 Liquidity falls in anticipation of and immediately following earnings announcements (e.g., Lee, Mucklow andReady, 1993; Kavajecz, 1999), dividend announcements (Koski and Michaely, 2000) and takeover announcements(Foster and Vishwanathan, 1994; Jennings, 1994). See Kim and Verrecchia (1994) and Krinsky and Lee (1996) for discussions of earlier empirical studies analyzing spread behavior around such information events.6 Kavajecz (1998) also explicitly models quantities and prices as separate choice variables. He forecasts that depthshould fall and spreads should widen around an increase in the amount of adverse selection.
with Nasdaq depth declining less than Exchange-listed depth. Once insider trading ends, depth
rebounds. Relative to the average quoted depth on the previous day, we find that ask depth is 38
percent lower for NYSE and AMEX stocks during insider trading intervals. In sharp contrast,
after controlling for lower Nasdaq depth, the quoted ask depth for Nasdaq stocks falls by only 3
percent during insider intervals.7
The results are even stronger when we exclude nine traded
stocks featured in non- Business Week news stories on the day before, or the morning of, the
insider trading day. After removing those stocks, we find larger ask depth reductions, with a
similar gap between the insider-related depth decreases for Exchange-listed stocks (-59 percent)
versus their Nasdaq-listed counterparts (-19 percent).
A salient feature of the present study is that it does not involve corporate insiders trading
vast numbers of shares based on internal information. Instead, the “insiders” in the case were
singling out firms after obtaining advance copies of a magazine column and buying a relatively
small number of shares of each company selected on the basis of that short-lived information.
This raises the questions of whether and how the private information gets impounded into prices.
The private information involved had a very short useful life, so insiders were pressed
into action in a relatively short trading window. We find that Thursday volume is not unusual up
to the time of the first insider trade. During intervals when the brokers traded, however, there are
significant increases in the number of trades, and there are further volume increases after the
brokers are done trading. The insider-day volume increase is large (almost two-thirds of the
previous day’s total volume), but the brokers’ trades only account for a small part of the increase.
Court records imply that the IWS information was shared beyond the group of defendants
charged by the SEC, but trades by the brokers’ associates only explain a fraction of the
additional trading. Altogether, the trades of all the individuals identified by the SEC as possibly
privy to some IWS information make up no more than 9.2 percent of the volume increase for
insider-traded stocks. There is no reason to believe that, although it did not prosecute all of them,
7 For Nasdaq stocks, ask (bid ) depth quotes are aggregated across all market makers quoting the best ask (bid ) price,so that our Nasdaq depth figures are comparable to their counterparts for Exchange-listed stocks.
source, Business Week . Those individuals traded only a third of the stocks mentioned in the IWS
columns — with the other two thirds forming a unique, ideal control sample. Our study is likewise
the first to contrast the impact of illegal insider trading in specialist and dealer markets.
The pioneering study of Meulbroek (1992) uses SEC case files on illegal insider trading
during the 1980-1989 period to determine if stock prices reacted to informed trading. Those files
provide information on securities traded, volume and date of trades for 320 defendants and 218
different companies. Her final sample comprises 183 different cases of insider trading. She finds
that the average cumulative abnormal return per insider trading episode is large (6.85 percent)
and amounts to 47.6 percent of the abnormal return on the day the inside information becomes
public.
8
She also documents that the median insider’s trading represents only 11.3 percent of the
affected stock’s total trading volume. Meulbroek makes a case, however, that insiders’ trades
account for most of the extra trading volume on insider days, and hypothesizes that insider trade-
specific characteristics — rather than volume per se — bring about the impounding of the inside
information into security prices. Using intra-day data, we are able to document that trades are
indeed different during insider purchasing intervals — they are much more numerous, yet smaller
in size, than at other times and are overwhelmingly buyer-initiated. In contrast to Meulbroek’s
findings, we find that insiders’ trades do not account for the major fraction of the trading volume
increase on insider days. Overall, our evidence suggests that the latter is in large part due to a
concomitant increase in noise trading by “falsely informed” or mimicking traders.
While Meulbroek (1992) and the present paper deal with a cross section of insider trading
cases, Cornell and Sirri (1992) and Chakravarty and McConnell (1997, 1999) analyze illegal
trading by corporate insiders during two takeover attempts. Those case studies extend
8 Similarly, we find that the Thursday (i.e., insider-day) price increase for stocks traded by our five brokers is only afraction of the total price increase following the release of the IWS column on Friday. Still, it is difficult to comparethis result directly with Meulbroek (1992). On the one hand, it may be that the additional trading and related priceincrease on Thursday led naive IWS readers to believe that the column was all the more relevant, which should bring about an even bigger jump on Friday if readers traded on that basis. Indeed, we find a bigger overnight price jump for stocks traded by the brokers than for comparable IWS stocks that they did not trade. On the other hand, itmay simply be that smaller firms, which make up a majority of the stocks traded by the brokers, routinelyexperience larger Friday IWS “bounces” than other firms in our control sample.
Corwin and Harris (2002) find that such halts do not resolve price uncertainty in a sample of
Nasdaq stocks. In particular, spreads more than double following Nasdaq halts and only decrease
after 20 to 30 minutes following the resumption of trading. Based on these findings, they argue that
Nasdaq dealers, faced with incomplete knowledge of aggregate order flow, may be at a
disadvantage to better-informed investors following halts. That conclusion is consistent with
evidence that specialist markets appear better equipped to detect insider trades (Heidle and Huang,
2002). Our results provide further support for that interpretation, based on evidence from actual
insider trades.9
Finally, to the extent that we focus on illegal trades based on positive news from advance
copies of print media, our paper is also related to a sizable literature on the stock market impact
of financial columns. The columns that have attracted academic attention are the Wall Street
Journal ’s “Heard on the Street” (e.g., Lloyd-Davis and Canes, 1979; Liu, Smith and Syed, 1990;
and Beneish, 1991) and “Dartboard” columns (e.g., Barber and Loeffler, 1993; Greene and
Smart, 1999; and Liang, 1999), as well as — the focus of the present paper — Business Week ‘s
“Inside Wall Street” column (e.g., Sant and Zaman, 1996). All studies of financial columns find
significant positive excess returns when good news is reported.10 For favorable mentions in
“Inside Wall Street,” average abnormal returns on the publication day ranged from 1.2 to 1.9
percent during the 1980’s. Using more recent data, we find abnormal returns more than twice
that size, both six months before and during the insider-trading period.
Sant and Zaman (1996), however, show that a favorable mention yields significant
abnormal returns only for stocks that are followed by fewer than 21 analysts and that, for such
stocks, the magnitude of the returns increases as the analyst following decreases.11 A key 9 Many other studies document differences in trading conditions between dealer and specialist markets. Mostconcentrate on differences in trading costs or items directly related to such costs. Examples include Huang and Stoll(1996), Barclay (1997), Bessembinder (1997, 1999), Bessembinder and Kaufman (1997a,b), Clyde, Schultz andZaman (1997), LaPlante and Muscarella (1997), Barclay et al. (1999), Stoll (2000), Weston (2000), Chung,VanNess and VanNess (2001) and references cited in those papers.10 The U.S. evidence presented in those papers is consistent with that from other countries. See, e.g., Wijmenga(1990) in the case of the Netherlands.11 It is unlikely that the stockbrokers knew about Sant and Zaman’s research, as it was not published until 1996.However, they may have known of an earlier, well-publicized case of insider trading involving the same IWScolumn. In 1988, several security breaches occurred at Business Week . A number of people obtained advance copies
question, tackled by Sant and Zaman for the IWS column and by Greene and Smart (1999) and
Liang (1999) for “Dartboard” picks, is whether that positive impact is long-lived. The answer is
negative. In particular, Sant and Zaman (1996) find that the initial IWS announcement effect is
negated after 26 trading days and that, within six months of a positive recommendation, these
same stocks earn large negative abnormal returns.12
For stocks with the smallest analyst
following (0 or 1-to-5 analysts), the loss exceeds 15 percent. Overall, making illicit gains based
on advance access to the IWS column requires trading in stocks that have little analyst following
and closing positions quickly.
III. Data
According to the criminal case filed by the U.S. Attorney and to the civil case filed by the
SEC, the scheme to obtain advance copies of Business Week ’s IWS column started in June 1995
and ended with the February 5, 1996 issue.13 A total of 116 firms were mentioned in the column
during that eight-month period. Court records provide information on securities traded by the
five brokers and their associates; the date, volume and cost of each insider trade; and, for the
brokers, the time of each trade and the profits earned from each transaction. Of the 116 firms, the
stockbrokers did not trade in 76 companies, leaving 40 traded firms. We remove 10 companies
from the traded sample: nine that were traded by a broker’s customer and but not by the brokers,
which are missing time stamps, and one that had only stock options traded by one broker. 14 The of the magazine from printing plants owned by R.R. Donnelley & Sons, and information was also leaked fromwithin the company. Eleven individuals were convicted or settled charges of insider trading, including threestockbrokers and S.G. Ruderman, Business Week’s radio broadcaster, who went to prison for his participation.12 Consistent with that result, Greene and Smart (1999) find that statistically and economically significant negativeabnormal returns in the 29 days following publication of the “Dartboard” column erase all of the positive initial
effect, leaving no evidence of persistent abnormal returns. Liang (1999) also finds strong mean reversion during the15 days following publication, sufficient to erase the initial announcement effect for “Dartboard pro picks.”13 See United States v. Joseph Falcone, 99 Cr. 332 (TCP) and SEC v. Smath et. al ., 99 CV 523 (TCP).14 The court records contain no information about the timing of the trades made by the brokers’ customers (whowere never charged) or about the profits they made. Most of the customers’ IWS-based transactions were small.The main exception is a set of trades made by a named customer of two of the brokers. In addition to trading 21 of 30 stocks also purchased by the brokers, this customer traded nine IWS stocks that the brokers did not trade. Five of those additional trades were relatively small (ranging from 1,000 to 4,000 shares), and the other four trades (up to8,000 shares) involved large companies mentioned in the IWS column: Conrail, MCI, American Express and OlinCorp. These nine stocks are removed from the sample.
Thursday, this impact is generally concentrated at the open on Friday. Even though there is
significant buyside interest throughout Friday, the provision of liquidity is high enough that the
price impact is negligible after the open. These results are illustrated in Table 4 for all 30
companies traded by the stockbrokers and the 21-company subset that did not have any other
news announcements on Wednesday or Thursday.
Table 4
For each panel, Table 4 estimates two regression models to explain the buyside index and
interval returns using data summarized in 15-minute intervals.16 All regressions are corrected for
heteroskedasticity using White’s correction method. The first version (Models 1 and 3 in Panel
(a); Models 5 and 7 in Panel (b)) includes dummy variables to capture Thursday and Friday
effects relative to Wednesday, which is captured in the constant term. The “Insider Trading
Period” dummy variable captures the effects during the intervals in which the stockbrokers were
trading. Typically, trading was completed within at most two 15-minute intervals. The “Nasdaq”
dummy captures the effect of Nasdaq versus Exchange-listed companies.17
An interaction term is
also included to capture the differential effects of insider trading on Nasdaq companies. The
second version (Models 2 and 4 in Panel (a); Models 6 and 8 in Panel (b)) omits the “Insider
Trading Period” dummy, but includes a dummy variable that captures this period plus the
remaining periods in the day. The idea is that this variable captures the effects of other market
participants learning of, or reacting to, the informed trading—possibly causing a cascade of
buying activity in the market. These other participants may be friends, relatives, customers or
associates of the stockbrokers named in the SEC complaint. Also, there may be mimicking or
momentum traders noticing the presence of the privately informed traders. Because the “Insider
Trading Period” and the “Insider & Remaining Day” variables are highly correlated, they are not
16 Not all 15-minute intervals in a day are included in this sample. An interval is excluded if it contains only zero or one trade.17 Two companies were listed on the AMEX. These are combined with NYSE companies to form the set of exchange-listed companies.
completely rule out this possibility, the evidence between dealer and specialist markets makes it
less likely.
For these stockbrokers, the average trade size is 5,320 shares in Nasdaq stocks and 4,683
shares in exchange-listed stocks. The average depth at the ask is 2,809 shares on Nasdaq and
16,395 shares on the exchanges. With depth for exchange-listed stocks about 5.8 times the depth
of Nasdaq stocks and the stockbrokers’ trade size is smaller on the exchanges, we would expect a
greater reaction in depth on the Nasdaq if the stockbrokers’ trades were only exhausting inside
limit orders on the book. However, Table 6 shows that depth on the exchanges reacts more than
depth on the Nasdaq. Thus, it appears that specialists on the exchanges are playing an active role
in managing quoted depth during these insider periods.
18
This view is also consistent with
Kavajecz (1999), who finds that depth provided by both specialists and limit orders decreases
prior to earnings announcements for NYSE stocks.
VI. Conclusions
Using a unique episode of repeated insider trading by outsiders across a group of stocks,
we show that liquidity providers do not adjust spreads during periods of genuinely informed
trading. Instead, they adjust offered depth to reduce the risk of transacting with informed traders.
This result holds regardless of the type of market where companies traded, although the
magnitude of the depth decrease is less for Nasdaq-listed stocks compared to exchange-listed
companies. In addition, we show that, during and immediately following periods when insiders
are buying shares, trades are much more numerous—yet smaller in size—than at other times.
The results show that trades during those periods are overwhelmingly buyer-initiated. In contrast
to earlier findings, however, insiders’ trades do not account for the major fraction of the trading
volume increase. Our evidence suggests that the volume increases may reflect an increase in
noise trading by “falsely informed” or mimicking traders.
18 The median results provide the same conclusions. The median trade size by stockbrokers is 4,000 shares in Nasdaq stocks and 3,500 shares in exchange-listed stocks. The median depth is 2,732 on Nasdaq and 10,915 on theexchanges.
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Regressions are run for 30 stockst raded by brokers for all companies combined (Panel a) and excluding 9 companies that had othernews
Wednesday or Thursday (Panel b). Transactions data are analyzed in 15 minute intervals on Wednesday, Thursday and Friday. Trade
Lee-Ready algorithm (+1 for buyer initiated and -1 for seller initiated). The"Buyside Index" measuresbuying sentiment asthe sum of the
interval. The larger the sum, the more buyer-initiated trades. "Interval Returns" are computed from the last trade in the previous interval t present interval. The independent variables are as follows. "Thursday" and "Friday" are dummy variables for these trading days. "Insider
dummy variablefor intervals of insider trading. "InsiderPeriod and Remaining Day" equals one on Thursday for all intervals after the fi
"Nasdaq" dummy equals one for Nasdaq stocks; zero for exchange-listed stocks. The two interaction terms measure the effect of inside
stocks. Regressions are corrected for heteroscedasticity using White's method. p-values are shown in parentheses below the coefficients.
F-test of Regression 5.42 5.75 9.89 10.64 6.95 6.95
Observations 1101 1101 1101 1101 1101 1101
Effects of Insider Trades on Market Makers Spreads and D epth
Table 6
Panel (a): 30 Stocks Traded by Insiders
Regressions are computed for 30 stocks traded by insiders using transactions data analyzed in 15 minute intervals on Wedne
Panel (a) shows the results with all 30 stocks while Panel (b) shows results excluding 9 stocks that had other news announceme
Thursday. "Quoted Spread" is the average bid-ask spread during the interval, "Effective Spread" equals two times the abso
between price and the midpoint of the bid-ask spread, averaged over the interval. "Depth" is reported at the best bid and offer av Nasdaq stocks, depth is aggregated across all market makersquoting at the best bid or ask. All dependent variables are measured
15-minute intervals on Wednesday, the day before the inside information was obtained. The independent variables are all
"Relative Volume", which equals the volume in the trading interval relative to the average volume across all 15 minute interv
method is used to correct for heteroscedasticity. p-values are shown in parentheses below each estimated coefficient.
This figure shows the median percentage trading volume from the open on the Wednesday precedingthe release of the relevant IWS column until the close on the Friday when the magazine is publiclyreleased. These data are measured in 15-minute intervals relative to the average volume on Wednesday.
This plot is drawn for the 21 stocks that at least one of the brokers traded (“traded”) and 44 that noinsider traded according to the SEC complaint (“not traded”), using transactions data summarized in 15-minute intervals. Only stocks not mentioned in another news source on the insider trading day (Th) or the day before (W) are included. The two vertical lines represent the end of the first (W) and second(Th) trading days. The arrow indicates the 15-minute interval ending at 1:00 PM on Thursday, theearliest starting time for insider trades in the sample.
This figure shows the median percentage price change from the open on the Wednesday preceding therelease of the relevant IWS column until the close on the Friday when the magazine is publicly released.These data are measured in 15-minute intervals relative to the average price on Wednesday. This plot isdrawn for the 21 stocks that at least one of the brokers traded (“traded”) and 44 that no insider tradedaccording to the SEC complaint (“not traded”), using transactions data summarized in 15-minuteintervals. Only stocks not mentioned in another news source on the insider trading day (Th) or the day before (W) are included. The two vertical lines represent the end of the first (W) and second (Th)trading days. The arrow indicates the 15-minute interval ending at 1:00 PM on Thursday, the earlieststarting time for insider trades in the sample.
-1%
1%
3%
5%
7%
9%
11%
13%
M e d i a n C h a n g e v . A v g . W e d n e s d a y
The average holding period is computed for stocks traded by stockbrokers who had advance copies of
the "Inside Wall Street" column in Business Week magazine. The holding period decreasedsignificantly over the period of trading, reflecting learning on the part of these brokers about the
temporary nature of the Business Week "bounce."
6.73
4.67
3.17
1.67
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
D a y s
June/July Aug/Sept Oct/Nov Dec/Jan
Figure 3
Average Holding Period for "Inside Wall Street" Stocks Traded by Brokers