Introduction to the Theories and Varieties of Modern Crime in Financial Markets

Marius-Cristian Frunza

• Publisher: Academic Press
• Year: 2015
• Print ISBN: 9780128012215
• eBook ISBN: 9780128013496
• Topic: Business
• Subtopic: Investments & Securities
• Index: Business

Introduction to the Theories and Varieties of Modern Crime in Financial Markets explores statistical methods and data mining techniques that, if used correctly, can help with crime detection and prevention. The three sections of the book present the methods, techniques, and approaches for recognizing, analyzing, and ultimately detecting and preventing financial frauds, especially complex and sophisticated crimes that characterize modern financial markets.The first two sections appeal to readers with technical backgrounds, describing data analysis and ways to manipulate markets and commit crimes. The third section gives life to the information through a series of interviews with bankers, regulators, lawyers, investigators, rogue traders, and others.The book is sharply focused on analyzing the origin of a crime from an economic perspective, showing Big Data in action, noting both the pros and cons of this approach.- Provides an analytical/empirical approach to financial crime investigation, including data sources, data manipulation, and conclusions that data can provide- Emphasizes case studies, primarily with experts, traders, and investigators worldwide- Uses R for statistical examples

III

Typologies of Crime on Financial Markets

Chapter 3A

Insider Trading

Abstract

Insider trading is one of the frequent securities frauds concerning mainly the equity markets. Insider trading violation in relation to the stock of a company has various morphologies and can involve both company’s employees and directors and service providers (attorneys, consultants, printing firms).

Reconstituting the social network of the individuals having access to material nonpublic information into a company can help in the understanding of further insider trading violations.

Insider trading is far from being the easiest fraud to detect and mainly whistleblowers or investigations similar to classic organized crime can produce relevant evidence for such cases.

Keywords

Insider trading

Material nonpublic information

Logit model

Spoofing

Short selling

Market equilibrium

Outline

1 Background 93

2 Overview of Insider Trading 95

3 Outlook 98

1 Background

Efficient markets aim to capture through price the full information available for a particular asset, from both public and nonpublic sources. Therefore, no agent can generate excess returns on such a market. Most markets are rarely efficient and in the best case they follow the weak or the semi-strong forms of efficiency. This implies that prices adjust rapidly with the arrival of new public information. Therefore, an agent that executes trades by having particular information before it becomes public might be able to generate profits. These trades can have a structural relationship with the market if they concern a large share of the market liquidity and thus can affect the relevance of the price. They can also be minor if they represent only a small part of the market volume and they have little or no effect on the price.

Figure 1 shows the various relationships between information type and trades. If an agent has nonpublic information and deals in minor trades, it is often characterized as insider trading, with a small impact on prices. If the agent performs structural transactions in large volumes she can make the price oversensitive to the new information before it becomes public. If structural nonpublic information is made public it can also change the market equilibrium as the traders will try to adjust.

Figure 1 Information and market transactions: if an agent has nonpublic information and deals in minor trades it is often characterized as insider trading, with a small impact on prices. If the agent performs structural transactions in large volumes she can make the price oversensitive to the new information before it becomes public. If structural nonpublic information is made public it can also change the market equilibrium as the traders will try to adjust.

An agent can also alter the public information by generating fake rumors or hoaxes and this can change the market momentum, being considered as market manipulation. “Pump and dump” security frauds are a typical case where a person creates public information in order to distort market prices.

An agent can also, through structural trades, alter the price to give the impression to the market that there is virtual nondisclosed information. Spoofing, for example, is a practice where traders place limited orders outside the current bid and asking prices to give an artificial impression of an intention to buy or sell shares and to ultimately change the perception of other traders about the price. Short selling is another example of this type of inference.

2 Overview of Insider Trading

Figure 2 shows the evolution of the number of insider trading cases in the United States as reported by the Security Exchange Commission (SEC). Insider trading is a term that most people associate with misconduct. But insider training also includes legal transactions when corporate executives, officers, directors, and employees, owning stocks or stock options in their own companies buy and sell those securities depending on the information that they might have working within that company. These types of trades should generally be reported to the domestic r...

Table of contents

• Cover image
• Title page
• Table of Contents
• Copyright
• Preface
• Prologue
• Acknowledgments to the First Edition
• Mr X Anonymous Interview
• Nick Leeson: Interview
• I: Short History of Financial Markets
• II: Origin of Crime on Wall Street
• III: Typologies of Crime on Financial Markets
• IV: Modern Financial Crime
• Epilogue
• Bibliography
• Index
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