Wealth or Stealth? The Camouflage Effect in Insider Trading

Battle Count: 50

The paper is primarily about market microstructure theory and regulatory economics rather than direct trading strategy development. However, it provides important insights for quantitative traders: (1) understanding stealth trading patterns and trade-size clustering relevant to execution algorithms; (2) price impact estimation under legal risk constraints; (3) detection of abnormal order flow patterns; (4) understanding how informed traders camouflage their activity, which affects market quality metrics; (5) implications for algorithmic execution that must account for regulatory scrutiny. The camouflage effect and stealth index γ are relevant for understanding market behavior but the paper does not directly propose trading strategies.

The theoretical framework involves complex mathematical analysis: existence proofs for finite-N equilibria (Appendix B), convergence rate derivations, log-concavity arguments (Prékopa-Leindler theorem), and handling of non-monotone civil penalty structures. The calibration requires solving systems of nonlinear equations involving Lambert W functions, complementary error functions, and fixed-point iterations. The general criminal penalty case (Section 6, Supplemental Appendix A) adds further complexity with multiple asymptotic regimes. However, the limiting equilibrium is analytically tractable and the calibration formulas (SB.5-SB.12) are explicit.

The paper provides complete mathematical proofs in appendices, explicit calibration formulas (SB.5-SB.12), and detailed parameter specifications. However, it relies on external datasets (Meulbroek 1992, Kacperczyk and Pagnotta 2024, Patel and Putniš 2021) that may require access. The fixed-point algorithm for finite-N equilibrium is described but not provided as code. Key parameters (σ=1000, μ=1.68625, p=1/2) are explicitly stated.