Insider Trading

Insider Trading in Nutshell

Insider trading happens when someone takes an advantage by trading using Material Non-Public Information (MNPI).
Insider trading is an offence against the integrity of the markets and is also a violation of the AML and Anti-Market Abuse laws.
The laws require Regulated Entities to identify, monitor and report suspicious trading activity, referred to as Suspicious Transaction Report, and Suspicious Activity Report (STR/SAR).
RapidAML assist surveillance by identifying trades with a specific within a specified time frame and transactions.

What is Insider Trading?

Insider Trading is the buying or selling of a company’s stocks by a person who has material non-public information (MNPI) about that company.

Insider Trading is often referred to as market abuse or illegal trading.

Most often, the parties involved in insider trading are those who have the closest relationship with the company in question, including executive officers, managers, and employees, and other parties that have access to non-public or confidential information.

If a person is an insider, he is not legally allowed to buy or sell securities based on this information because doing so would constitute illegal insider trading.

The illegal conduct of Insider Trading has many adverse consequences, including harming the integrity of the market, eroding investor confidence in the market, and being prosecuted under AML and market abuse regulations.

How Insider Trading Connects to AML/CFT/CPF Surveillance

Rising profits from Insider Trading on MNPI must be laundered through the financial system, creating forensic patterns that require the filing of STR/SAR.
Anti-Money Laundering Surveillance is used to detect non-normal trading patterns, rapid movement of large trades at the same time, offshore wire transfers, and routes through “shell companies".
Misappropriation of MNPI is a gateway to many larger risks, including market manipulation, securities fraud, and improper disclosure.
In addition to the SEC, FCA, ESMA, MAS, ASIC, and other global regulators, there are heavy penalties for violations such as fines, suspension of trading, imprisonment and forfeiture of assets.
To ensure that abuse of MNPI does not occur, strong surveillance and Real-Time Monitoring are required.

Risk Indicators for Detecting Insider Trading

The following are examples of Key Risk Indicators:

High-volume trades with short time frames prior to the official disclosure of significant corporate events, followed by the rapid liquidation of those trades.
Abnormal profit potential (i.e., unusually high-risk return of capital) and fast fund transfers for short-term duration in advance of upcoming corporate disclosures.
Sudden high-value trades made by unknowledgeable or inexperienced customers tied to corporate events.
Unusually large trading volumes originating from jurisdictions known for secrecy or weak regulatory oversight, potentially indicating attempts to hide or move illicit funds.

Challenges in Detecting and Monitoring Insider Trading

When compliance gaps arise, RapidAML ensures protection from risk, with the following factors:

High False-Positives Rate: The volumes of trades create a lot of false positives for surveillance operations to deal with and therefore obscure the real indications of abuse.
Fragmented Data Sources: Data is fragmented across exchanges and countries, which prevents the identification of a coordinated pattern of trading.
Opaque Beneficial Owner: Impossible to track the beneficial owners, which prevents tracking of who is making illicit profits.
Cross-Border Enforcement Barriers: They cause significant delays in the communication of information between regulators and financial institutions.

Best Practices to Limit and Detect Insider Trading

Ensure the strict governance of MNPI by developing and maintaining insider lists and controlled trading windows to limit access and minimise the risk of unauthorised use of confidential information.
Implement trade surveillance and transaction monitoring capabilities to identify and report high-volume trades that are executed outside normal timeframes and to monitor the rapid movement of funds between accounts.
Apply Enhanced Due Diligence (EDD) when conducting due diligence on investors who have made repeated abnormal profits in connection with corporate events.
Conduct training on AML and Market Abuse for the frontline staff, brokerage, and compliance team.
Use Open-Source Intelligence (OSINT) and public registration databases to verify ownership and detect shell companies.

How RapidAML Strengthens Insider Trading Detection and Controls

Our AML software, provides advanced transaction monitoring and trade surveillance analytical capabilities to help Regulated Entities identify and minimise the potential insider trading threats they face.

RapidAML allows faster detection of potential abusive market behaviours, reduces false positives, improves compliance with market-abuse laws, and supports timely SAR/STR reporting.

FAQs

1. What must firms do if they identify trading behaviour indicative of insider trading?

Firms must report Suspicious Activity to the appropriate supervisory authority

2. How does Insider trading relate to AML?

Insider trading creates gains that are illegal; the movement or concealment of illegal earnings derived from insider trading is considered to be Money Laundering, which is monitored and reported through Suspicious Transaction Reporting/Suspicious Activity Reporting.

3. What is the function of an AML Program to mitigate the risk of insider trading?

AML program lays down clear policies and procedures to deal with insider trading.