Dealer Behaviour and Market Quality When Insiders Trade

This paper examines the impact of insider trading activity on the trading behaviour of dealers and on market quality. Specifically, the activity we investigate is the trading of London Stock Exchange listed equities by incumbent company directors. We find that dealers adjust their inventory control strategies during periods of such insider activity. In the ten day period subsequent to an insider trade, dealers tighten their inventory control resulting in stronger mean reversion in inventories. However, there is no evidence that the depth of the market is affected by the insider trade or that dealers feel the need to utilise the inter-dealer market to share inventory risks to a greater extent. However, when price changes due to temporary inventory considerations are taken into account, the large price changes reported in many insider-trading studies disappear. The paper also investigates if the dealer participating in the insider trade acts as a quasi-insider