Insider Trading and Information Networks
As one might predict, insider trading presumably occurs between people who know each other in a professional setting, for example between two investment bankers at different firms who have worked together professionally in the past. This, however, would not be the case. Due to a recent study on the nature of insider trading and the network of people with whom it occurs, insider trading is most prevalent among people who have close personal relationships- i.e. links between close friends and family.
Based on graphs assembled in the study, the most likely demographic for a person to be caught with insider trading was someone who has a large amount of assets under management and a lesser amount of sophistication with trading. For example, a rich family member of a friend of an investment banker who himself does not work in finance is highly likely to be caught for insider trading because if he makes large trades off insider tips the monetary gain is more likely to be noticed, as well as his apparent lack of knowledge of the financial field in which he was investing raises eyebrows. The way this study was conducted focused on the intricacies of social relationships between people involved in insider trading scandals, as well as the type of information disclosed and to which people. It is a great demonstration of information as we’ve been studying in class. The networks formed of the people involved show a significant trend that personal friends of insiders are most likely to be caught for investment banking.
The article can be found here: http://www.valuewalk.com/2014/10/information-networks-evidence-illegal-insider-trading-tips/