Please rotate your device to landscape mode to view the charts.

Price Revelation from Insider Trading: Evidence from Hacked Earnings News

Journal: Journal of Financial Economics

Date: 20220301

Author: Akey, Pat; Gregoire, Vincent; Martineau, Charles

Abstract:
From 2010 to 2015, a group of traders illegally accessed earnings information before their public release by hacking several news wire services. We use this scheme as a natural experiment to investigate how informed investors select among private signals and how efficiently financial markets incorporate private information contained in trades into prices. We construct a measure of qualitative information using machine learning and find that the hackers traded on both qualitative and quantitative signals. The hackers' trading caused 15% more of the earnings news to be incorporated in prices before their public release. Liquidity providers responded to the hackers' trades by widening spreads.

Link: Google Scholar

Key Findings

Insider Trading Impact on Price Discovery

Evidence shows that overnight returns were 15% less responsive to earnings surprises when hackers had early access to press releases, indicating significant price revelation before public announcements.

Hard vs Soft Information Trading

Traders used both quantitative earnings data and qualitative press release content, with strongest trading occurring when both signals aligned, leading to average returns of 4.4% for high-signal events.

Market Maker Response

Liquidity providers detected and responded to informed trading by widening spreads, with effective spreads increasing by 3% of a standard deviation during periods of hacker access.

Price Responsiveness to Information

  • Return response coefficient drops from 1.426 to 1.211 for hacked news
  • Represents 15.1% reduction in price sensitivity
  • Based on Table 3, Panel A, Column 4 regression results

Trading Volume Response

  • Share turnover increased by 4.9% during hack periods
  • Share volume rose by 3.5%
  • Option volume showed largest increase at 7.2%
  • Based on Table 6, Panel A results

Market Maker Spread Response

  • Effective spreads increased across all percentiles during hack periods
  • Largest increase in realized spreads above 70th percentile
  • Based on Figure 7 results

Contribution and Implications

  • First study to demonstrate how informed retail traders process both quantitative and qualitative information in trading decisions
  • Provides evidence that market makers can detect and respond to informed trading when traders face time constraints
  • Shows that even a small number of informed trades can reveal significant information before public announcements
  • Highlights the importance of cybersecurity in maintaining market integrity and fair information dissemination

Data Sources

  • Price response chart constructed using regression coefficients from Table 3, Panel A, Column 4
  • Volume response chart created using percentage changes reported in Table 6, Panel A
  • Spread response visualization based on percentile analysis shown in Figure 7 of the paper
  • Sample period: 2010-2015, covering 43,687 earnings announcements, including 8,980 exposed to hacks