Do employees of financial intermediaries such as brokers, financial analysts and fund managers take advantage of their access to private information? In their March 2018 paper entitled “Personal Trading by Brokers, Analysts, and Fund Managers”, Henk Berkman, Paul Koch and Joakim Westerholm examine the personal trading of employees at Finnish financial intermediaries (experts) who have regular access to material private information. In Finland, regulations require that these experts disclose personal trades in any stock listed on the Nasdaq OMX Helsinki Exchange. Using personal trading data for 1,249 experts at 40 Finnish financial intermediaries representing 90% of the Finnish fund management industry and 99% of the Finnish brokerage industry, plus aggregated trading data of Finnish retail investors, during August 2006 through August 2011, they find that:
- Personal trades of experts outperform retail investors over windows up to one month. For example, experts significantly outperform retail investors by an average:
- 0.11% on the day after purchases, and by another 0.05% per day over the rest of the week.
- 0.08% on the day after sales, and by another 0.03% per day over the rest of the week.
- Experts especially outperform when they trade simultaneously with other experts and when they trade before earnings announcements, analyst recommendation revisions and unexpected large stock price changes. For example, average next-day expert outperformance is:
- 0.28% (0.74%) for trades when 5 to 10 (more than 10) experts trade similarly.
- 0.83% for trades made one day before earnings announcements.
- 0.36% for trades made one day before analyst recommendation revisions.
- 2.46% for trades made one day before large stock price moves.
- There are indications of frontrunning and information leakage before public disclosure of corporate insider trades, execution of block trades by foreign and domestic institutions and recommendation revisions by analysts at the same firm as the expert trader. For example, average expert cumulative 10-day outperformance is:
- 1.0% for trades made the same day as corporate insider trades.
- 1.1% (2.5%) for trades made the day before execution of foreign (Finnish) block trades.
- 1.7% for trades by experts at the same firm during the three days before release of analyst recommendation revisions.
In summary, evidence indicates that employees of financial intermediaries outperform other individual investors by exploiting their access to private information.
Cautions regarding findings include:
- The available Finnish sample may not be representative of other countries due to differences in regulations and/or corporate cultures.
- Data are somewhat stale.
- Findings may not materially affect other traders.
