Who are the Beneficiaries When Insiders Trade? An Examination of Piggybacking in the Brokerage Industry

We study the impact of brokerage relations with company insiders on insider-affiliated market makers' quoting behavior and the possibility of information leakage via piggybacking when insiders trade. We find that market makers affiliated with the brokers used by insiders post more aggressive ask quotes vis-agrave;-vis their peers during periods when insiders trade. This aggressiveness is partially attributable to the pressure to complete sell orders for their company insider clients. However, we also find that this behavior is dependent on the management role of the insider and the degree of information asymmetry as measured by a) the number of analysts following the company, b) analyst forecast dispersion, c) bid-ask spread of the stock and d) post-event stock return. In addition, piggybacking diminishes when the firm of the broker-dealer making markets has had a prior investment banking business relationship with the company. The findings suggest that in addition to the volume of insider trades, the potential information content of insider trades also affects insider-affiliated market makers' abnormal quoting behavior. We find that this information leakage through insiders' brokers results in trading based on information signaled by those insiders