Shadow Trading – Bloomberg

The question that interests me here is: What is the denominator? Was Panuwat the first person ever to notice that, when he got inside information about his company, he could use it to trade other companies’ stocks? No, absolutely not, tons of my readers have also noticed that, and they keep writing to me about it. Was Panuwat the first person ever to actually do it? That I do not know; perhaps my readers are curious theoreticians but uniformly law-abiding.

But what evidence there is suggests that, no, lots of people have done this. After the Panuwat case, we discussed a paper by Mihir Mehta, David Reeb and Wanli Zhao, which named this phenomenon — using inside information about one company to trade a correlated stock — “shadow trading,” and which found statistical evidence that it is pretty widespread. Earlier this year, we discussed another paper finding evidence of shadow trading using exchange-traded funds. If shadow trading happens all the time and the SEC has brought one enforcement action, well, I leave the math as an exercise for the reader. This is not any sort of advice about anything!

Source: Shadow Trading – Bloomberg