Chasing Private Information

Do public trade signals (volume and asset prices) reveal the presence of privately informed investors? What signals are most reliable in this regard? We examine these issues using a novel sample of over 5,000 equity and option trades based on material and nonpublic information documented in the Securities and Exchange Commission's (SEC) insider tradinglitigation files. We find that information embedded in equity (option) markets offersa generally weaker (stronger) signal of private information. Days when informed investors trade display, both in stock and option markets, abnormally high volatility and volume and low illiquidity. The most consistent signals combine both option and stock volume, especially the volume of leveraged and short-term options. We exploit the implementation of the SEC's Whistleblower Program to assess the validity of our approach against selection bias. Overall, our results provide new guidance in the search for private information.