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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

Background and Context

The Hack

From 2010-2015, hackers illegally accessed earnings announcement press releases before public release by breaching IT systems of major newswire services.

The Scheme

The hackers sold the information to traders who then made trades based on the non-public earnings information in the hours before official release.

The Study

Researchers analyzed nearly 9,000 affected earnings announcements to examine how informed traders select stocks and how markets incorporate private information into prices.

Higher Trading Activity During Hack Periods

  • Shows increased trading activity during periods when hackers had access to earnings information
  • Option volume showed the largest increase at 7.2%
  • Demonstrates that hackers' trading had measurable impact on market activity

Reduced Price Response to Earnings News After Hacks

  • Shows how much less stock prices reacted to earnings news when hackers had early access
  • Similar reduction in price response to both quantitative (hard) and qualitative (soft) information
  • Indicates that private information was being incorporated into prices before public announcement

Characteristics of Stocks Targeted by Hackers

  • Reveals the characteristics of stocks that hackers preferred to trade
  • Hackers targeted larger, more liquid stocks with high institutional ownership
  • Shows hackers selected stocks where they could trade more easily without detection

Increased Trading Costs During Hack Periods

  • Shows how trading costs increased when hackers were active
  • Market makers widened spreads in response to increased informed trading
  • Demonstrates market makers could detect and respond to informed trading activity

Information Revelation Over Time

  • Shows how information was gradually incorporated into prices throughout the trading day
  • Most information revelation occurred in afternoon hours when hackers were active
  • Demonstrates the timing pattern of informed trading activity

Contribution and Implications

  • First study to examine how informed traders choose which stocks to trade when they have access to private information about multiple firms
  • Demonstrates that market makers can detect and respond to aggressive informed trading by widening spreads
  • Shows that both quantitative and qualitative information from earnings releases are valuable for informed trading
  • Provides evidence that even a small number of informed traders can significantly impact price discovery

Data Sources

  • Trading activity chart based on Table 6, Panel A showing order flow measures
  • Price response chart based on Table 3, Panel A and B coefficients
  • Stock characteristics chart based on Table 1, Panel A descriptive statistics
  • Trading costs chart based on Table 6, Panel A spread measures
  • Information revelation chart based on Figure 5 cumulative returns data