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The efficacy of regulatory intervention: Evidence from the distribution of informed option trading

Ronald C. Anderson, David Reeb, Yuzhao Zhang and Wanli Zhao

Journal of Banking & Finance, 2013, vol. 37, issue 11, 4337-4352

Abstract: A substantive body of equity-market academic research documents an extensive range of costs arising from the SEC’s October 2000 adoption of strictures on selective disclosure and insider trading; suggesting an unusual outcome, specifically, an increase in informed trading. We investigate the efficacy of the SEC’s regulations by examining informed trading in an attractive setting for exploiting private information; the options market. Using data on the S&P 1500 industrial firms, our analysis indicates that about 38% of firms exhibited symptoms of informed option trading prior to regulatory intervention. After regulatory intervention, we observe that only 19% of firms show symptoms of informed trading. In additional testing of ADR firms – explicitly exempt from complying with Reg FD, we find no evidence of a change in informed option trading from pre- to post-regulation; suggesting that the SEC’s strictures on US firms led a to a significant reduction in informed option trading. Notably, our proxies for large shareholder and financial analyst access are associated with the largest decreases in informed option trading. In developing a unique measure of informed trading based on option market data, we provide evidence on the efficacy of security regulation in limiting informed trading.

Keywords: Informed trading measures; Options market; Selective disclosure; Stochastic dominance (search for similar items in EconPapers)
JEL-codes: G14 G32 G38 (search for similar items in EconPapers)
Date: 2013
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