Insider and stealth trading with dynamic legal risk
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arXiv
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| Main Authors: | , |
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| Format: | Preprint |
| Published: |
2026
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| _version_ | 1866917538120597504 |
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| author | Qiao, Bixing Xia, Weixuan |
| author_facet | Qiao, Bixing Xia, Weixuan |
| contents | The present paper investigates how insiders strategically navigate ongoing legal risk while leveraging stealth trading within a continuous-time Kyle-type framework. Legal enforcement operates concurrently with trading, which dynamic can be adversely obscured by a large surrounding population of noise traders. While surveillance intensity responds directly to the insider's trading intensity, triggering a random prosecution time, the resulting legal sanctions encompass both strategy-focused criminal penalties and profit-dependent civil penalties. Employing a new impact-neutral measure change, equilibrium analysis shows that even after achieving stealth, the insider internalizes regulatory exposure, and enforcement can significantly shape equilibrium trading strategies. The associated limiting equilibria yield a rich set of outcomes, with three key insights for regulatory impact: (i) under committed regulatory scrutiny, the insider trades a time-varying function of the discrepancy between the asset's fundamental value and its market price, and trading may intensify indefinitely near the end of the trading horizon as legal risk recedes; (ii) merely raising penalties as an advantageous selection cost proves ineffective in offsetting declines in regulatory diligence; (iii) criminal penalties remain essential for deterring aggressive insider trading, as they impose critical temporal constraints on trading intensity not achievable through civil penalties alone. |
| format | Preprint |
| id |
arxiv_https___arxiv_org_abs_2605_27684 |
| institution | arXiv |
| publishDate | 2026 |
| record_format | arxiv |
| spellingShingle | Insider and stealth trading with dynamic legal risk Qiao, Bixing Xia, Weixuan General Economics Economics The present paper investigates how insiders strategically navigate ongoing legal risk while leveraging stealth trading within a continuous-time Kyle-type framework. Legal enforcement operates concurrently with trading, which dynamic can be adversely obscured by a large surrounding population of noise traders. While surveillance intensity responds directly to the insider's trading intensity, triggering a random prosecution time, the resulting legal sanctions encompass both strategy-focused criminal penalties and profit-dependent civil penalties. Employing a new impact-neutral measure change, equilibrium analysis shows that even after achieving stealth, the insider internalizes regulatory exposure, and enforcement can significantly shape equilibrium trading strategies. The associated limiting equilibria yield a rich set of outcomes, with three key insights for regulatory impact: (i) under committed regulatory scrutiny, the insider trades a time-varying function of the discrepancy between the asset's fundamental value and its market price, and trading may intensify indefinitely near the end of the trading horizon as legal risk recedes; (ii) merely raising penalties as an advantageous selection cost proves ineffective in offsetting declines in regulatory diligence; (iii) criminal penalties remain essential for deterring aggressive insider trading, as they impose critical temporal constraints on trading intensity not achievable through civil penalties alone. |
| title | Insider and stealth trading with dynamic legal risk |
| topic | General Economics Economics |
| url | https://arxiv.org/abs/2605.27684 |