UNH Today

When the federal government shuts down, agencies like the Securities and Exchange Commission (SEC) are forced to furlough most of their staff. That means there are fewer regulators overseeing insider trading — trades made by company executives or others with access to non-public information. 

Daniel Bens, professor of accounting at UNH’s Peter T. Paul College of Business and Economics, is involved in preliminary research that shows that insider trading spiked during the last prolonged shutdown from Dec. 27, 2018 to Jan. 25, 2019, when the SEC furloughed 94% of its staff. 

Bens and fellow researchers — Gavin Cassar, Ying Huang, and Thomas Keusch from INSEAD — analyzed thousands of insider stock trades, comparing the trade activity of U.S. firms during the shutdown with other years, as well as with firms in other countries where oversight continued. They also reviewed SEC enforcement records before, during, and after the shutdown. The preprint research is posted on SSRN and is currently in a second round of peer review at “The Accounting Review.”

What has the research revealed about insider trading during the last shutdown? 

We found that insider trades during the shutdown were unusually profitable, averaging 0.016% of a firm’s market value compared to 0.011% in normal periods. For a company worth around $14.6 billion (the average value within the study’s sample), that translated into an extra $800,000 to $1.6 million in profit on a single trade compared to similar trades in other years.   

Much of the gain came from “opportunistic” sales — trades timed around nonpublic information rather than routine, pre-scheduled transactions.   

Did this happen immediately after the government shut down? 

Not during the first week of the shutdown, likely because insiders were unsure whether SEC enforcement would be disrupted. But, once it stretched past the first week, insiders likely became more confident with the limited enforcement, and insider trading profits increased significantly. 

What does an increase in insider trading mean to the average investor? 

It’s a matter of market fairness. 

I can’t say it is something that should prevent anyone from investing. However, it does mean that an individual investor is at more of an information disadvantage if insiders are trading on their private information So, they may be trading with someone with better information, which means the outsider could buy or sell at the ‘wrong’ price.  

Does it mean they’ll lose all of their money? No. Does it mean they have a lower chance of higher profits? Yes. 

Did the SEC recognize this uptick in insider trading during the last shutdown? 

I’m not aware. 

Can we expect a similar situation if the current shutdown persists? 

The SEC website indicates that just about all activities are being stopped until funding resumes. 

What lesson could the SEC take from your research? 

I think the most practical thing to do would be to look back at the activities that occurred once they get back to work, and use analytical tools more aggressively to detect unusual patterns. This is a tradeoff between new oversight and looking in the past, so each manager would have to make that call. But our research suggests that looking backward should be more carefully considered. 

What motivated your research into this issue? 

There’s an ongoing debate about whether the SEC should be self-funded, like the Federal Reserve, rather than having its budget tied to congressional approval. As researchers, we don’t take a stand on that issue, but we aim to provide evidence that can contribute to the conversation. 

It would be advisable to have a reserve fund for enforcement activities. The government would have to decide what the most important things are — like they currently do with the TSA at airports and borders. Perhaps SEC enforcement should continue as well. But this is a slippery slope, as all agencies could make the same argument.