Presence of informed trading before SEC crypto asset classification announcements

Determine whether market patterns indicative of pre-announcement activity observed in the one-week [-7, -1] window preceding U.S. Securities and Exchange Commission announcements that classify specific crypto assets as securities are attributable to informed trading by conducting trade-level analyses and assessing order size imbalances around those events.

Background

The paper applies a market-model event study to 48 U.S. SEC enforcement actions and public announcements that explicitly classify named crypto assets as securities, measuring abnormal returns and trading volumes around the events. The authors document significant negative cumulative abnormal returns post-announcement and notable volume contractions, with evidence of pre-announcement volume effects for more volatile and illiquid assets.

While these pre-event patterns suggest the possibility of informed trading or information leakage ahead of SEC announcements, the authors state they cannot conclusively attribute the observed behavior to informed trading using their aggregate data setup. They point to trade-level analysis and order size imbalances as necessary tools to rigorously assess whether pre-announcement activity is driven by informed trading.

References

Although our study observes market patterns indicative of pre-announcement activity, we cannot definitively attribute this behavior to informed trading. Subsequent studies may more rigorously assess the presence of informed trading in response to SEC regulatory interventions by employing trade-level analysis and order size imbalances, as demonstrated in Feng et al. (2018).

— Uncertain Regulations, Definite Impacts: The Impact of the US Securities and Exchange Commission's Regulatory Interventions on Crypto Assets  (2412.02452 - Saggu et al., 2024) in Section 3.2 (Determinants of direction and magnitude), immediately following Table 4 and preceding Section 4 (Conclusion)