A Comparison of Trading Models Used for Calculating Aggregate Damages in Securities Litigation

By Barclay, Michael; Torchio, Frank C. | Law and Contemporary Problems, Spring-Summer 2001 | Go to article overview

A Comparison of Trading Models Used for Calculating Aggregate Damages in Securities Litigation


Barclay, Michael, Torchio, Frank C., Law and Contemporary Problems


MICHAEL BARCLAY [*]

FRANK C. TORCHIO [**]

I

INTRODUCTION

II

For approximately two decades, the General Trading Model ("GTM") has been used in securities litigation to estimate the number of shares damaged by alleged fraudulent misrepresentations by defendants. The GTM estimates the fraction of in-and-out trading volume and the fraction of retained volume. "In-and-out volume" refers to shares bought and sold within the class period; "retained volume" refers to shares purchased and held through the final disclosure that reveals the fraud. This is typically the last day of the class period. Estimates of the number of damaged shares from the GTM have been used in conjunction with a theory of true value (or conversely, artificial inflation) for the security to estimate aggregate monetary damages. [1]

Over the years, variations of the GTM predicated on different assumptions and/or parameters have been developed. The variations include single-trader models, such as the proportional and accelerated trading models, and multi-trader models. [2] This article compares the results of these models and critically evaluates the conclusions reached in previously published research.

This article demonstrates that results from the proportional single-trader model, GTM (1x), are consistent with the results of multi-trader GTMsfc when appropriate assumptions and parameters are used. No evidence was found to reject the GTM (1x) as a scientific method to estimate the number of damaged shares in securities litigation.

BACKGROUND

In securities litigation, damages arise when defendants make false or misleading statements that artificially inflate the stock price. [3] If an investor purchases the stock at this artificially inflated price, and the price later declines when the fraud is revealed, the investor will suffer damages from paying too much for the stock. In general, damages per share are calculated as the artificial inflation when the shares were purchased minus the artificial inflation when the shares were sold. For example, shares purchased when the stock price was artificially inflated and held through a disclosure that reveals the fraud typically are considered to be damaged. Shares purchased and then sold before any revelation of the fraud, however, are typically not considered to be damaged because these shares were passed on before any deflation in value.

Experts on damages in securities class actions generally do not have access to the trading records of individual class members. Consequently, the number of damaged shares is commonly estimated from a security's reported daily trading volume. Although the reported trading volume is quite reliable, the number of damaged shares is generally less than reported volume for several reasons.

First, reported volume may overstate the trading volume by the plaintiff class because it includes trades by specialists on the New York Stock Exchange ("NYSE") or market makers on the National Association of Securities Dealers Automated Quotation system ("NASDAQ") who buy from one investor and sell to another. One must adjust the reported volume to remove these double-counted trades. Recently published research suggests that a suitable correction is obtained by reducing NYSE reported volume by approximately ten percent and reducing NASDAQ volume by approximately fifty-eight percent. [4]

A second adjustment to volume is necessary to eliminate shares that were purchased during the class period and sold before the revelation of the alleged fraud. In many cases, these in-and-out shares have no associated damages because they were purchased and sold at prices with the same artificial inflation. [5] Historically, it has been common practice among economic experts for both plaintiffs and defendants to adjust volume for non-damaged, in-and-out volume using a statistical trading model. [6] The trading model is a mathematical model that estimates, on each day of the class period, the fraction of volume that is in-and-out volume and the fraction that is retained volume.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

A Comparison of Trading Models Used for Calculating Aggregate Damages in Securities Litigation
Settings

Settings

Typeface
Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.