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Study Shows $3 Billion is Traded in ETFs by Insiders

February 13, 2023
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In an academic study, the authors found that insider trading of $2.75 billion was hidden with ETFs that consisted of target firms' stocks by traders with the knowledge of upcoming mergers and acquisitions.

Researchers at the Stockholm School of Economics in Riga and the University of Technology, Sydney found that there were “significant levels” of such shadow trading transactions over the period of 13 years when they studied US companies and ETFs, according to their research paper. Using statistics obtained by observing statistically significant increases in volumes in 3% to 6% of the same industry ETFs on average in the five days prior to the announcement of M&A announcements, the authors obtained their results.

Using randomized control samples of other ETFs and other trading days, Elza Eglite, Dans Staermans, Vinay Patel, and Talis Putnins found that these ETFs, which are most likely to be traded by insiders when shadow trading occurs, had significantly higher levels of abnormal trading. According to their study published on Jan. 26, 2012, this is due to the fact that insider trading is more likely to occur.

From 2009 to 2021, this activity accounted for a volume of $212 million dollars per year, according to the paper, which is entitled Using ETFs to Conceal Insider Trading.

“Given that we only examine Shadow Trading in ETFs prior to M&As and not prior to any other price-sensitive news announcements, we can provide a lower bound for the amount of shadow trading in ETFs,” the authors wrote. 

The results of the study indicated that the phenomenon was most prevalent in the healthcare, technology, and industrial sectors. It has been reported that shadow trading occurs in 2% to 12% of exchange-traded funds in these three sectors, according to the authors. 

Despite the ease with which single-stock insider trading can now be identified, trading-related securities are more suspect. Market participants are finding new and more sophisticated ways of evading the scrutiny of regulators in the last few years, as they have become more sophisticated. It was highlighted in the paper that there was the only prosecution of this type to date, where a Medivation Inc. employee was charged by the Securities and Exchange Commission for purchasing shares of Incyte Corp. in 2016 after learning that Pfizer Inc. would be acquiring it soon after. 

As evidenced by the charges, "regulators have begun monitoring and enforcing against shadow trading in stocks related to the trades," the authors wrote. “There is a consensus among the authors of our paper that law enforcement agencies should also investigate trading in other related securities such as exchange-traded funds.”

Bryan Curtis
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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