![]() ![]() The model recognizes that in the absence of a prosecution case, either no insider trading occurred, or insider trading occurred but was not detected and prosecuted and estimates probabilities of these outcomes. The models address the issue that prosecuted cases are just a non-random sample of all instances of insider trading by jointly modelling both processes: insider trading and its detection/prosecution. In our recent paper, we estimate the underlying prevalence of insider trading using structural estimation models known as “detection controlled estimation” (DCE). This notion is illustrated by Comerton-Forde and Putniņš (2014), who find that only one in three hundred cases of closing price manipulation is detected and prosecuted by regulators, indicating that prosecutions are only the tip of the iceberg. Related questions include what are the characteristics of stocks in which insider trading occurs most often? And what makes it more likely that a given case will be detected and brought to prosecution? These questions have remained elusive because prosecuted cases of insider trading represent a non-random subset, not the entire population. The problem is that we can’t directly observe insider trading cases that are not detected or never brought to prosecution, leading to the longstanding puzzle of how much illegal insider trading actually occurs in financial markets and what fraction is brought to prosecution. On the other hand, SEC prosecutions provide a lower bound estimate of the extent of insider trading – approximately 50 insider trading cases are prosecuted by the SEC per annum. For example, the former US Attorney for the Southern District of New York, Preet Bharara, suggests that insider is trading is “rampant”, and is undertaken by company insiders and hedge funds. While it is clear that insider trading occurs, opinions vary significantly as to the total amount of illegal insider trading and whether it has increased or decreased over time. In 2020 alone, the US Securities and Exchange Commission (SEC) employed approximately 1,300 staff members in its Enforcement Division and committed $550 million in resources to investigating and prosecuting illegal insider trading. Substantial regulatory and enforcement resources are spent combatting insider trading in financial markets. ![]()
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