Assessment of informed trading in the Brazilian equity market: Market cleanliness methodology

This study extends prior work on the measurement of informed trading to the Brazilian equity market. The quantitative analysis employed two market cleanliness methodologies that have been widely applied in academic and regulatory research and that could be replicated using public data. The analysis advances our understanding of Brazil’s capital market integrity, provides a baseline for assessment of new regulation or regulatory practices and supplies more information for the regulator and investor’s decision-making process. The key intuition behind the methodologies is supported by the efficient markets hypothesis which claims that new information should immediately be converted into price changes. By examining significant price movements ahead of companies’ disclosures, the methodologies seek to measure the “cleanliness” of the market. The findings from this research suggest that levels of informed trading measured using Brazil’s data were higher than the values obtained in similar studies using the United Kingdom’s and Australia’s data. The Securities and Exchange Commission of Brazil introduced a strategic project focused on primary insider trading during late 2015, and there are signs that informed trading has decreased from 2015 to 2016. However, in order to properly evaluate the impact of the project, future measurements of informed trading are still necessary.