Front-Running Spurs Short Selling

Illegal “front-running” on inside information about CEO trading is believed to spike short selling, according to Dow Jones. An academic study found that short sales jumped 13 percent on average on days when CEOs sell shares.

The unpublished study, “Do Short Sellers Front-Run Insider Sales?” analyzed 2,030 insider sales by CEOs from January 2005 to May 2007.

MIT Sloan School of Management assistant professor Mozaffar Khan told Dow Jones, “We see a significant increase in short sales prior to large insider sales but not prior to small insider sales.”

The study shows that there are a number of front-running situations; from CEOs informing friends and family of pending sales, to brokerage firm employees tipping off hedge fund clients.

The study relied on SEC filings of insider transactions, concentrating on sales by CEOs.

Khan said that the Australian method of requiring trade-by-trade reporting of short positions allows any negative information to be quickly obtained. The U.S. has yet to adopt the real-time short-sale data reporting due to high costs. Some also fear that same-day short-sale information could cause a panic and result in market crashes, according to Dow Jones.