Portal de Periódicos da CAPES

Insider Trading and Market Structure

2016; UCLA School of Law; Volume: 63; Linguagem: Inglês

0041-5650

Yesha Yadav,

Securities Regulation and Market Practices

Forthcoming, UCLA Law Review (2016) This Article argues that the emergence of algorithmic trading raises a significant challenge for the law and policy of insider trading. It shows that securities markets are dominated by a cohort of “structural insiders.” By virtue of speed and physical proximity to exchanges, these traders can systematically gain first access to new information, trade on it and change prices before the rest of the market can see its content. This Article makes three contributions. First, it introduces and develops the concept of structural insider trading. Securities markets increasingly rely on automated traders utilizing algorithms – or pre-programmed electronic instructions – for trading. Policy allows traders to enjoy important structural advantages: (i) to physically locate on or next to an exchange, shortening the time it takes for information to travel to and from the marketplace; and (ii) to receive feeds of richly detailed data directly to these co-located trading operations. With algorithms sophisticated enough to respond instantly and independently to new information, co-located automated traders can receive and trade on not-fully-public information ahead of other investors. Indeed, by the time that the rest of the market sees this information, it has long since become out-of-date. Secondly, this Article shows that structural insider trading exhibits harms that are substantially similar to those regulated under conventional theories of corporate insider trading. Structural insiders place other investors at a persistent informational disadvantage. Through their first sight of marketmoving data, structural insiders can capture the best trades and erode the profits of informed traders, reducing their incentives to participate in the marketplace. Despite the similarity in harms, however, this Article shows that doctrine does not apply to restrict structural insider trading. Rather, structural insiders thrive in full view and with regulatory permission. † Associate Professor of Law, Vanderbilt Law School. I am very grateful for thoughtful comment and conversations in the preparation of this Article. I am indebted to Professors Adam Badawi, Brad Bernthal, Margaret Blair, Chris Brummer, Anthony Casey, Paul Edelman, Elizabeth de Fontenay, Jonathan Glater, Kathryn Judge, Peter Molk, John Morley, Elizabeth Pollman, Bob Reder, Amanda Rose, Morgan Ricks, Randall Thomas, Andrew Schwartz, Chris Serkin, Holger Spamann, Kevin Stack and Pradeep Yadav. All errors are entirely my own. YESHA YADAV: INSIDER TRADING AND MARKET STRUCTURE DRAFT: SUMMER 2015 Page 2 of 61 Thirdly, the Article explores the implications of structural insider trading for the theory and doctrine of insider trading. It shows them to be increasingly incoherent in their application. In protecting investors against one set of insiders but not another, law and policy appear under profound strain in the face of innovative markets.