INSIDER TRADING Max Marshall

INSIDER TRADING ON THE STOCK MARKET

What is it?

Insider trading is the illegal use of information available only to people who work within inside a business or with a business in order to make a profit in financial trading. This insider information normally involves information that if it was published would have a significant effect on the share price of the company. Therefore the Insider trading legislation means that anybody who trades based on private information is guilty of illegal activity.

What is being done to stop it?

The government tries to stop insider trading by monitoring the trading activity in the market. The Securities and Exchange Commission (SEC) monitors trading activity. In Particular around important events such as earnings announcements, which may move their stock prices significantly. In Addition the SEC gets tips from whistle blowers who come forward with the knowledge that people are trading on non-public information. Whistleblowers can be employees of the company in question, or they can be clients, or service firms. The main incentive for whistleblowers to come forward is the fact that they can receive 10% to 30% of the fines collected from successful prosecutions of insider trading. Before it escalates to the government level, most companies take several measures to prevent insider trading. Some companies have blackout periods when officers, directors, and other designated people are barred from purchasing the company's stock usually around earnings announcements.

Examples of insider trading and why is it so hard to monitor

Ivan Boesky is an American stock trader who became well know for his role in an insider trading scandal during the 1980s. This scandal involved several other corporate officers, employed by major U.S. investment banks providing Boesky with tips about upcoming corporate takeovers. Boesky had his own stock brokerage company, Ivan F. Boesky & Company, and starting in 1975 when he opened his firm, he made large amounts of money speculating on corporate takeovers. In 1987, after a group of Boesky's corporate partners sued Boesky for misleading legal agreements detailing their partnership, the Securities and Exchange Commission (SEC) began investigating Boesky. It was later revealed that he was making his investment decisions based on information received from corporate insiders. Another example of insider trading occurred when R. Foster Winans a columnist at the Wall Street Journal wrote a column called "Heard on the Street." In every column, he would profile a certain stock, and the stocks in the column often went up or down according to Winans' opinion. Winans arranged a deal where he leaked the contents of his column. Specifically the stock that he was going to detail–to a group of stockbroker. The stockbrokers would then purchase positions in the stock before the column was published. After the brokers made some gains they would share some of the profit with Winans. Winans was eventually caught by the SEC. However, his case was tricky because the column was the personal opinion of Winans, rather than material insider information. Meaning that it was hard to pin him down for his crime.