Shadow Trading

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Shadow trading is a type of insider trading that involves buying or selling the shares of one company that is correlated in some way to another company in the same relatively small industry.[1]

The legal concept of shadow selling is a novel, undocumented unusual event that corporate insiders can use to circumvent insider trading regulations and SEC scrutiny.[2] The U.S. Securities and Exchange brought a complaint against a biopharmaceutical executive in the case SEC v. Panuwat, which alleges insider trading even though the defendant did not trade in shares of his employer.[3][4][5] The SEC had never brought a case before based on shadow trading.[6]


In 2015, Mihir N. Mehta of MIT Sloan & Temple University, David M. Reeb* of National University of Singapore and Wanli Zhao of Southern Illinois University published a paper titled "Shadow Trading:Do Insiders Exploit Private Information About Stakeholders?"

Their paper suggested that "target firms," are those competing firms with a correlation to competitors. These target firms "experience a 12% to 17% change in symptoms of informed trading activity prior to the release of private information by a business p| The authors suggest five reasons why shadow trading arose more readily when source firms:

  1. "Have no explicit policy restricting shadow trading by their employees"
  2. "Experience regulatory shocks to own firm insider trading"
  3. Encounter exogenous employee mobility shocks"
  4. Internally promote their CEOs"
  5. f=Face the sudden deathof the CEO and promote internally.

The authors informally estimated each typical shadow trading event they studied generated profits of up to $678,000.[7]