Insider trading is when a person in possession of confidential information uses it to gain an unfair advantage in the financial markets. The involved party will typically buy or sell a public company’s financial securities, or encourage a third party to do so, based on material information unavailable to anyone else in the market.
Insider trading and the Market Abuse Regulation (MAR)
Here are the important details in MAR regarding insider trading:
The scope of market abuse
MAR outlines three types of market abuse that firms should take measures to prevent, including illegal disclosure of confidential information, market manipulation and insider dealing. The regulation not only prohibits buying and selling company securities based on inside information; it also forbids making any changes to pending orders.
Maintaining insider lists
To ensure compliance, companies must maintain event-based insider lists in case of delayed exposure of information to the public. These lists should contain the personal details of individuals holding inside information, the reason for including them and the date and time the information was disclosed to them.
This helps investigators understand who had access to the information and when.
A closed period under MAR is when certain individuals are prohibited from conducting transactions using company securities to prevent insider dealing. It includes the time after a public company discloses inside information to its management, such as annual earnings reports, and before that information is disclosed to the public.
Examples of insider trading
Some examples of insider dealing include:
- Classic insider trading: The classical theory of insider dealing is when the insiders — company executives, employees or anyone with a fiduciary duty to the company — trade financial securities using material, private information.
- Tipper-tippee: In this type, an insider “the tipper” passes on trading advice based on confidential information to a non-insider “tippee”. Both the tipper and the tippee can be held accountable if the latter trades based on this information. However, the tipper is in breach of MAR for disclosing inside information in any case.
- Misappropriation: The misappropriation theory of insider dealing is when individuals, who are not directly associated with the company, come into possession of inside information and use it for trading. For example, lawyers, consultants, accountants or investment bankers who misuse a client’s confidential information for insider dealing.