Insider trading is a crime perpetrated by an individual who buys or sells securities based on privileged information not available to others. This also includes the use or disclosure of privileged elements which could allow for illicit gains with stock transactions, which are prohibited by the regulation of financial market surveillance.
These acts are punishable with up to five years imprisonment or hefty fines. An insider is someone who has a price sensitive insider information on a paper before this information is publicly released. These acts also go a long way in dampening the confidence of investors, whether big or small.
In some countries which include the United States, trading carried out by key employees, directors, or some shareholders should be made public or reported to the appropriate regulator.
Access to information extends to some who have professional relations with a given company, and these include the liquidator, bank employees, brokerage firms, contractual partners, or business lawyers, etc. All these people bear the obligation to refrain from any operation on the market once they have access to inside information.
Drastic changes in a company’s position can have an impact on the company’s value. And such events can be in the form of unexpected increases in profits or large orders, unexpected earnings decline, bankruptcy or indebtedness, as well as mergers, personnel changes among other things.
The role of the insider trading control is to prevent insider trading on national stock exchanges. Their goal is to ensure the fair operation of securities markets and compliance with statutory requirements. A key element of their monitoring tasks is the detection and tracking of prohibited insider trading.
The authorities monitor securities traded with the help of special automated systems, as well as manually examine any abnormal price movements or suspicious transactions. They filter out from the daily turnover on the stock exchanges and the over-the-counter abnormalities.
The offence of insider trading takes effect only through the realization of a stock transaction. The law criminalizes transactions made directly by insiders themselves but also those made via proxy. Either way, the insider remains the principal offender.
It is also common for other investors keen on striking gold to adopt the same trading positions taken by the insider traders with the hope of benefiting from their privileged insights. Typically, corporate insiders enjoy in-depth information on the health of a corporation, and their trading positions indicate vital signs. For example, the pending retirement of an key official who could be disposing his/her shares or any other significant developments with implications on the status of the entity.