ETFs Used to Mask Insider M&A ‘Shadow Trades,’ Researchers Say

More than $200 million in such moves executed annually, academics claim.

Managing Editor
Reviewed by: Ron Day
Edited by: Ron Day

Exchange-traded funds are being used to conceal more than $200 million annually in questionable insider trades known as shadow trading, according to a recently published academic paper, which claims to offer the “first estimates of shadow trading in ETFs.” 

Traders with insider knowledge of upcoming mergers and acquisitions are buying ETFs that include a target company’s shares before the public is aware of the deal, according to a joint Australian/Swiss paper titled “Using ETFs to Conceal Insider Trading” published Feb. 1. 

Holders of the funds take advantage of the subsequent rise in the target company’s share price, the paper written by academics from Stockholm School of Economics in Riga and the University of Technology, Sydney. 

Buying and selling stocks using insider information not otherwise available to the public is illegal, and while laws seek to deter such activity, efforts to end-run law enforcement continue. In ETF shadow trading, the insider trade is concealed when holders of nonpublic information buy ETFs that include the underlying securities, the researchers wrote.  

Over a sample period from 2009 to 2021, evidence of shadow trading in ETFs prior to price-sensitive news is “widespread.” Increase in ETF volume was noticed in the five days prior to the release of M&A news in 3%-6% of ETFs that cover the industry in which the deal was occurring. At least $2.75 billion in such trades was made over the 13-year period, the authors estimate. 

“ETFs provide an attractive instrument for insiders to trade their private information,” they wrote. The funds are “more subtle than trading the company shares directly, helping reduce scrutiny from law enforcement.” 

ETFs’ liquidity also permits the price impact of insider trades to be reduced, the authors wrote. 

In a 2020 paper, shadow trading refers to using inside information to buy shares of firms related to the target company. In an example cited by the authors in the recent paper, in 2016, an employee of Medivation Inc. bought options in Incyte Corp. shortly before Pfizer announced it was buying Medivation, because the employee knew bankers had compared Incyte to Medivation. Incyte shares gained 8%.  

The authors say their research raises questions about the adequacy of insider trading law, and that it can boost financial markets’ integrity by guiding the efforts of watchdogs. 

Trading by executives and employees, also called insider trading, is permitted as long as it’s not done using information not available to the public. 


Contact Ron Day at  [email protected] or follow him on Twitter at @RonDayETF 

Ron Day is Managing Editor at He joined the company in October 2022 and previously served as editor and deputy managing editor.

Ron covered business and financial news at Bloomberg News for 20 years, working on the breaking news, technology, commodities, headlines and First Word teams. He was previously senior editor at ESG news outlet Karma Impact and filled the same role at Boundless Impact. He also covered a variety of beats at New Jersey daily papers including the Daily Record in Parsippany, the North Jersey Herald & News and the Asbury Park Press. Ron's freelance work has been published in, and

Ron is an advocate and fan of literacy. He hopes to one day master his Telecaster, rather than the other way around. His wonderful family includes a 10-lb. malti-poo named Emmy.