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Garfinkel Insider Trading Study Noted

Information on trades by company insiders appears to leak out to specialist firms on the New York Stock Exchange before that information becomes available to the public, according to a study from the University of Iowa. As a result, the study suggests, transaction costs may be higher on days when insiders are trading. The study, published in a professional journal last fall, compares the in-person deal-making of the NYSE with the more anonymous, computer-driven trading of the Nasdaq Stock Market. Interaction with brokers apparently gives the NYSE's specialist firms a hint that an informed trader may be making a trade, according to JON A. GARFINKEL, a co-author of the study. When an insider is trading, the study found, NYSE specialists -- the floor-trading firms assigned to facilitate the trading of specific stocks -- are inclined to widen the effective spreads on transactions. They do this either by raising the price at which they are willing to sell stock (when an insider is buying) or by lowering the price at which they are willing to buy (when an insider is selling). In effect, NYSE specialists charge more to protect themselves from the possibility that they are trading against an insider, Mr. Garfinkel said.

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