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Publications
Publications
  • 2016
  • Article
  • Journal of Investment Consulting

Cloaked Trading

By: Lauren Cohen, Dong Lou and Christopher J. Malloy
  • Format:Print
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Abstract

Using a novel, proprietary database of micro-level trading activities by asset managers, we show strong evidence of asset managers engaging in strategic trading in order to “cloak” their most valuable trades. This takes the form, for instance, of a manager who sells her entire position of Microsoft on March 30, and then repurchases to re-establish the same position on April 1. This manager will economically be holding the same position throughout, yet without having to publicly signal this position. These cloaked trades earn an abnormal return of 370 basis points in the following month, or over 36% per year. We further show that the same managers do not engage in such information-rich cloaked trading around other month ends (non-reporting months), nor in institutional accounts (that are not subject to the reporting requirements) at the exact same quarter-end dates. Moreover, the returns to these cloaked trades continue to accrue over the subsequent quarter and do not reverse in the following year, implying that these cloaked trades are informative about fundamental firm value, which is gradually revealed into prices.

Keywords

Strategic Trading; Information; Asset Management; Investment

Citation

Cohen, Lauren, Dong Lou, and Christopher J. Malloy. "Cloaked Trading." Journal of Investment Consulting 17, no. 2 (2016): 69–80. (Winner of the Best Paper Prize of the Journal of Investment Consulting Academic Paper Competition, 2016 ; Winner of the Institute for Quantitative Investment Research (INQUIRE) Grant, 2014.)
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About The Author

Lauren H. Cohen

Finance
→More Publications

More from the Authors

    • 2023
    • Faculty Research

    Too Many Managers: The Strategic Use of Titles to Avoid Overtime Payments

    By: Lauren Cohen, Umit Gurun and N. Bugra Ozel
    • 2022
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    Hidden Alpha

    By: Lauren Cohen, Manuel Amman, Alexander Cochardt and Stephan Heller
    • October 2022 (Revised January 2023)
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    Century Bank: Closing Time?

    By: Lauren Cohen, Grace Headinger and Bill Kwon
More from the Authors
  • Too Many Managers: The Strategic Use of Titles to Avoid Overtime Payments By: Lauren Cohen, Umit Gurun and N. Bugra Ozel
  • Hidden Alpha By: Lauren Cohen, Manuel Amman, Alexander Cochardt and Stephan Heller
  • Century Bank: Closing Time? By: Lauren Cohen, Grace Headinger and Bill Kwon
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