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Predatory trading: ethics judgments, legality judgments and investment intentions

Daphne Sobolev (School of Management, University College London, London, UK)
James Clunie (Long-Short Consulting Limited, Cambridge, UK)

Review of Behavioral Finance

ISSN: 1940-5979

Article publication date: 13 May 2022

Issue publication date: 19 June 2023

748

Abstract

Purpose

Predatory trading is a stock market trading technique in which certain market participants exploit information about other market participants' need to trade. Predatory trading often harms others. Hence, this paper examines the determinants and effects of financial practitioners' and lay people's judgments of predatory trading. Specifically, it investigates how the public availability and reliability of the exploited information affect their ethics and legality judgments and how the latter influence their behavioral intentions and regulation support.

Design/methodology/approach

The authors conducted two scenario judgment studies. In the first study, participants were financial practitioners, and in the second – lay people.

Findings

Practitioners often judge predatory trading to be ethical. Practitioners and lay people incorporate in their ethics and legality judgments the public availability of the exploited information but tend to discount the legal reliability criterion. Lay people justify their ethics judgments using harm, legal or profit maximization principles. Practitioners' intentions to engage in predatory trading and lay people's intentions to let predatory fund managers invest their money depend on their judgments, which influence their regulation support.

Originality/value

This paper is the first to explore people's judgments of predatory trading. It highlights that despite the harm that predatory trading involves, practitioners often judge it to be ethical. Although law tends to lag behind financial innovation, people base their judgments and hence also behavioral intentions on their interpretation of the regulation. Hence, it reveals a dark aspect of the relationship between ethics and legality judgments.

Keywords

Acknowledgements

This paper forms part of a special section “Behavioural Finance and Ethics”, guest edited by Robert Hudson.

The authors would like to thank Professor Matrin Kilduff (The School of Management, University College London) for his helpful comments and support.

Funding: This work was supported by the School of Management, University College London.

Citation

Sobolev, D. and Clunie, J. (2023), "Predatory trading: ethics judgments, legality judgments and investment intentions", Review of Behavioral Finance, Vol. 15 No. 3, pp. 275-291. https://doi.org/10.1108/RBF-09-2021-0184

Publisher

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Emerald Publishing Limited

Copyright © 2022, Emerald Publishing Limited

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